Sierra Wireless Inc
TSX:SW
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
N/A
N/A
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
This alert will be permanently deleted.
Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sierra Wireless Inc. Fourth Quarter and Year-end Conference Call. [Operator Instructions]David Climie, Vice President of Investor Relations, you may begin the conference.
Thanks, Chris. Good afternoon, everyone. 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 will be as follows: Dave will provide a detailed overview of our fourth quarter and full year 2018 results, Kent will then provide his corporate update and Dave will provide the company's guidance for full year and first quarter 2019. That will be followed by Kent's summary comments, and then we'll open up the call for Q&A.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 securities laws. These statements include our financial guidance, statements on 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 the 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 risk factors in our AIF and the management's discussion and analysis, which can be found on SEDAR and EDGAR as well as other regulatory filings. This presentation should also be viewed in conjunction with our quarterly earnings release.With that, I'll now turn the call over to Dave McLennan for his review of Q4 and full year 2018.
Thanks very much, David, and good afternoon, everyone. Note that we report our financial results in U.S. dollars and on a U.S. GAAP basis. However, we also present non-GAAP results to provide a better understanding of our operating performance. As a reminder, a full reconciliation between our GAAP and non-GAAP results is available on our website.We had solid financial performance in the fourth quarter. Overall, consolidated revenue in Q4 was $201.4 million, an increase of 9.7% compared to the same period last year. OEM Solutions and IoT Solutions both had year-over-year growth, and we're in line with our expectations. Enterprise Solutions was slightly below our expectations due to timing of some shipments late in the quarter, which resulted in revenues being slightly below the midpoint of our Q4 guidance.Product revenue, which includes all revenues associated with the sale of embedded modules, gateways, routers and other hardware devices was $178.2 million in Q4, up 5.3% on a year-over-year basis. Services and other revenue, which includes revenue associated with our cloud and cellular connectivity services as well as engineering, support and warranty services, was $23.2 million, up 63% from Q4 2017, driven by our organic subscriber growth and the Numerex acquisition that included only 3 weeks of revenue in the comparable period a year ago. Services and other revenue was 11.5% of the company's total revenue in Q4.Adjusted EBITDA was $15.3 million, an increase of 9.6% compared to a year ago. Non-GAAP EPS was $0.25 per share, roughly in the middle of our guidance range. In Q4, non-GAAP gross margin was 32.7% compared to 33% -- 33.1% in Q1 -- in Q3, pardon me. OEM Solutions non-GAAP gross margin was 27.1%, similar to Q3's GM of 27.3%. Enterprise Solutions gross margin was 51.6% in Q4 compared to 54% in Q3. This sequential decrease was as expected and resulted from the impact of U.S. tariffs, which negatively impacted our cost of goods sold for our enterprise products by approximately $1.1 million. And finally, IoT Services gross margin improved to 44.6% in Q4 from 41.1% the prior quarter, in part due to improved -- an improvement of wholesale carrier cost during the quarter. Our non-GAAP OpEx in Q4 was $55.7 million, down slightly from the third quarter. We continue to show good cost control, and I'm very pleased we are able to slightly exceed our target, which we set at the start of the year to reduce our quarterly OpEx, to $56.5 million by Q4. The non-GAAP tax rate in Q4 was 12.2%. Our tax rate reflects the jurisdictional mix of our income across our various legal entities. Our full year 2018 rate was 8.3%.Looking at key non-GAAP metrics in the fourth quarter of 2018 compared to Q4 2017. On a year-over-year basis, consolidated revenue increased by 9.7% to $201.4 million, with 26% of quarterly revenue coming from our higher-growth, higher-margin Enterprise Solutions and IoT Services businesses. In Q4, OEM Solutions revenue was $148.7 million, up 6.4% year-over-year, reflecting increased demand in transportation, energy and industrial, partially offset by lower sales in mobile computing and sales in payment. Enterprise Solutions revenue in Q4 was $30.3 million, down 5% against a strong comp the prior year when our telematics business was running at a high quarterly run rate due to the bump in demand from implementation of the hours of service legislation in the U.S. fleet transport industry. Support and services revenue in the Enterprise Solutions, which includes our AirLink management services grew 32% year-over-year and continues to add to our recurring base of subscription-based revenue. Revenue in IoT Services was $22.4 million, up 89% year-over-year. This was driven by organic subscriber growth as well as the impact of the Numerex acquisition.Looking at adjusted EBITDA and non-GAAP EPS on a consolidated basis. In Q4 adjusted EBITDA was $15.3 million, which was up 9.6% compared to $13.9 million a year ago. And non-GAAP EPS in Q4 was $0.25 compared to $0.28 a year ago.Key metrics for the full year 2018 compared to 2017. On a year-over-year basis, consolidated revenue increased by 14.9%, with 26.5% of revenue in 2018 being generated by our higher-growth, higher-margin Enterprise Solutions and IoT Services businesses. OEM Solutions revenue was $538.2 million, up 5.2% year-over-year. Enterprise Solutions revenue was $119.9 million, up 18.1% year-over-year. And IoT Services business was $90.5 million, up 161% year-over-year, driven by both organic subscriber growth and the acquisition of Numerex. Adjusted EBITDA for the full year was $55.9 million, which was up approximately 2.2% compared to the prior year, and non-GAAP EPS for the full year was $0.90 compared to $1.05 in 2017.Looking at the balance sheet. We had strong cash flow generation during Q4, generating $16.9 million of free cash flow. In addition to strong free cash flow in the quarter, we also sold our tank monitoring business, known as iTank. This is a business we acquired through Numerex, and we determined that it was not strategic to our core IoT Services business. We divested iTank for proceeds of $6 million, of which $5 million was paid at closing, with $1 million being held in escrow pending achievement of certain milestones during 2019. The iTank transaction closed on December 31, 2018. During 2018, iTank generated $2.6 million of revenue and incurred a small operating loss.Overall, our cash position improved in the fourth quarter by $21.6 million, and we ended the year with $89.1 million of cash and no debt.I'd like to now turn the call over to Kent for an overview of our corporate and strategic initiatives. Kent?
Thanks, Dave. In the fourth quarter, we delivered solid results with 10% year-over-year growth in both revenue and adjusted EBITDA as well as good operating expense control. We also ended 2018 on a strong cash position on our balance sheet.Now let me take you through our strategy for 2019 and also share with you where we expect weakness in some areas of our OEM business in 2019 that will dampen our overall revenue growth for the year. This masks strong expected growth in the highest value parts of our business, our higher-margin hardware and recurring revenue segments. Let me share with you our strategic agenda going forward and how I plan to manage the transformation of the business to build on our strong and differentiated market position with a view to creating shareholder value in the years ahead.As the new President and CEO of Sierra Wireless, I spend significant time with our customers, suppliers, partners and employees. I have a different lens as a CEO than as a board member. I see tremendous opportunities over the next 3 to 4 years, but I'm also focused on some short-term challenges that I'm taking rapid action on. Strategically, I intend to accelerate the transformation of Sierra Wireless to becoming the leading global IoT solutions and services provider. We believe the total Sierra Wireless addressable market for IoT solutions is expanding rapidly, growing to over $10 billion by 2021. I believe Sierra is in the strongest position globally to win with our highly differentiated device-to-cloud value proposition. However, we need to move faster to capture a strong share of this IoT growth opportunity. So I've been taking action and, together with the Board of Directors, making strategic and organizational changes to transition the business and invest in the future of the company.In addition to these changes, I'm implementing a program to both invest in activities to drive growth and high-value solutions capabilities and key product technologies as well as implement efficiency and cost reduction programs to fund these initiatives. Organizationally, as I mentioned during our last call, I've appointed Jason Krause to the position of Chief Operating Officer. And he has been working diligently with our engineering, operations and product and solution teams over the last 4 months to road map a strong portfolio of products and solutions to enable us to more rapidly expand our integrated IoT solutions offering. To do this, Jason has centralized our 3 development teams into a single R&D entity that has brought greater efficiency, rigor and improved focus on execution.In addition to refining and streamlining our R&D processes, we've also centralized our product management to bring an integrated approach to providing end-customer solutions. And our operations team has been working with our component suppliers and contract manufacturers to seek ways to improve our process and efficiency and reduce our cost of goods sold.At the front end of the business, I have reorganized our go-to-market teams to prioritize on key IoT market segments so that we can attack the $10 billion TAM that I referred to before and target customer opportunities. I have reorganized our sales team into a single, unified sales and marketing organization focused on leveraging our IoT module leadership position into more highly integrated device-to-cloud solutions, targeting the most profitable IoT segments. To allow us to get our customers to market faster and enable them to scale their deployments quickly, modernize and create new revenue streams.We recently completed our global sales and solutions conference in January. Focusing our global sales leadership on the opportunities ahead and lining up our sales resources under Marc Osgoodby, our global sales leader; and announcing our global solutions capability under Marc Overton, our Chief Solutions Officer; and along with industry veteran, René Link, as Chief Marketing Officer, we have much better alignment in our global sales team today under new leadership. And our people are excited about selling new and existing customers a bundled solution of devices, connectivity, cloud management and security. We are also rolling out realigned compensation structures through award solutions and recurring revenue. I have combined the leadership of our strong global channel distribution activities to increase effectiveness and efficiencies. Our channel partners are a key part of our go-to-market program.As Dave mentioned earlier in his comments, we are also divesting some small assets that came with the Numerex acquisition, which are noncore to our strategic initiatives. We have a strong balance sheet, and we're taking the opportunity to simplify our business and give us focus and resources for the major market opportunity before us.On the cost side, I'm driving significant and sustainable programs to get more efficient. We are taking steps to reduce our cost of goods sold and operating cost by approximately $40 million to $50 million over the next 18 to 24 months. We have undertaken this cost reduction program with assistance from a third-party consultant, and we believe this transformation will lead to an improved operating model, provide capacity to reinvest in the business and create long-term shareholder value. The centralization of our R&D resources is part of our efficiency and effectiveness move. And so far, we have closed several small R&D sites as part of the centralization process. And in addition, we have commenced efficiency initiatives in other areas. We believe that our target savings of approximately $40 million to $50 million is achievable.While I'm driving cost reductions to enable a more profitable long-term business model, I'm simultaneously leading us to make important investments today, in advance of our anticipated cost savings delivery to accelerate our leadership in device-to-cloud solutions and increase the flywheel effect on our driving subscription-based revenue. To accomplish this, we need to invest in important technologies and innovations such as developing our intelligent edge software capabilities to enable improved data management between the cloud and the edge of network; enhance our global embedded soft SIM initiative, which we call Ready-to-Connect, and our global connectivity footprint and capability; designing leading-edge 5G embedded modules for the growing automotive and enterprise market as well as incorporating this technology into our gateway and router devices; and increasing our security capabilities for data management from cloud to the edge.Additionally, we're investing in our sales, systems and people to support the sale and delivery of recurring revenue solutions. And we also plan to leverage our strong device position and to capture market share in 2 significant growth cycles: one, the mass deployment of LPWA, Cat-M1 and NB1 technology globally, which started in 2018; and two, deployment of 5G LTE and 5G New Radio that will begin in the next couple of years. We believe that LPWA modules will lead to mass IoT adoption, with industry volumes growing several hundred million units annually over the next 3 to 5 years and as 5G is going to have a meaningful impact starting in 2022.As evidence of our focus on solutions, we announced in January that our Ready-to-Connect solution has gone into production on selected embedded modules and will be rolling out across a broader range of our embedded module product line in 2019. Ready-to-Connect has all the key elements required for fast deployment of an IoT application. It includes Sierra Wireless cellular module with an integrated SIM that is already preconnected to global networks and supported by our AirVantage IoT platform. By removing the complexity around SIM integration, it allows our customers to innovate in 1/3 of the time and eliminates the need to manage numerous vendors and platforms. Ready-to-Connect uses our multi-operator Sierra Wireless Smart SIM to provide reliable, global IoT connectivity, allowing businesses to use the same solution wherever they deploy. We believe this technology is a game changer. And other than Sierra, we are not aware of any other significant player in the IoT space that have a global MVNO, their own multi-IMSI SIM, a leading cloud platform and 25 years of device expertise. Some IoT players may have disparate parts. However, they don't have the ability to provide a fully integrated end-to-end IoT solution like Sierra can, one that is simple, scalable and secure. We already have some significant design wins in our Ready-to-Connect solution in Europe and North America, which should be ramping up later this year. And we are receiving very positive responses from customers globally. I'll be sharing more with you about this Ready-to-Connect win at our Analyst Day meetings in Q2.As I've discussed previously, when we sell our full solution versus just our hardware, we increase the customer lifetime value by 3 to 5x. And with the lower module cost with LPWA, the ratio becomes much larger and recurring revenue, a key value driver. The opportunity before us is significant. Today, we sell approximately 20 million modules per year. With the market accelerating and with the beneficial impact of LPWA, we see strong module volume growth over the next few years. For example, if we assume in the future 40 million module sales per year and assuming a 25% attach rate, I would hope to achieve more, we would add 10 million recurring revenue devices per year. At a minimum revenue assumption of $10 per year, that could potentially add $100 million of incremental recurring revenue per year.I have talked to many customers, and they find our solutions offering highly appealing and differentiated. They tell me that implementing an IoT project can be very complex and expensive. In fact, studies show that today, over 70% of IoT projects fail. Our complete solution offering is designed to solve this challenge.Here are some examples of new device-to-cloud wins. We've secured a new design win with Unimar, a global supplier of tower lighting products related to the aviation industry. Unimar needs to collect mission-critical data from the edge of the network to ensure that flight path hazards are properly marked and compliant with the FAA protocols. To reduce complexity and get to market quickly, Unimar selected our AirLink RV50 gateway, our SIM and our AirVantage cloud platform. Another good example of our device-to-cloud solution is our customer, MANN+HUMMEL, a large European based company that is using IoT for preventative maintenance on mobile equipment. With this customer, we are providing our Sierra Smart SIM connectivity service and AirVantage platform, and we're working with them on LPWA, Cat-M1 solutions. With real-time monitoring of their mobile equipment, MANN+HUMMEL can save approximately $750,000 per year on maintenance cost on an average fleet. So there's rapid payback on this IoT application.I want to share with you the way we are looking at the market and looking at our business in 2 components, and I will talk about both. We are currently evaluating these 2 business segments to manage our focus and more clearly delineate our solutions activities. As a result, we are looking at one business area focused on what we call embedded broadband and the other focused on IoT solutions and services. The embedded broadband segment would be comprised of our high-speed cellular embedded modules that are used in the automotive, mobile computing and networking markets. These are valuable segments that drive overall volume and cash flow for us but with lower gross margins and higher variability as we are not typically able to attach connectivity services to these devices. We have a strong customer base in these embedded broadband businesses that will be transitioning from 4G LTE to 5G. This is a high-volume business with some very strong global customers. As an example, we expect our existing automotive OEM design wins to date, excluding any potential new 5G wins, to deliver approximately $1.1 billion in revenue over the next 5 years. At times, this embedded broadband group can be affected by macroeconomic headwinds and various design wins cycles as we've seen.Before taking over as CEO, certain product investment decisions were made that favored investing in automotive to the detriment of some requirements of our mobile computing and networking customers. Consequently, while we are enjoying success in the automotive segment, we expect our market share to decline in mobile computing until the next cycle of 5G design wins. These past decisions are negatively impacting our financial performance in 2019. With some declines in our PC OEM and networking segment and automotive ramping later in the year, Q1 revenue has some additional timing weakness. Thus, we expect that the Embedded Broadband segment, which was slightly less than half of our 2018 revenue, will decline in 2019. In addition, due to a ramping of lower-margin automotive business and some onetime declines in higher-margin mobile computing and network business, we expect gross margin overall profitability for this segment to be significantly weaker this year. I'm disappointed in this situation but have now refocused the company on regaining our traditional market leadership. We have extremely valuable global customer relationships, and we are investing in our 5G embedded module road map where other module players may not be. I believe it's a great opportunity to win many new design wins going forward and to drive long-term growth and value in this part of our business.The other business segment that we're evaluating is IoT Solutions and Services. This would include our existing IoT Services business, our Enterprise Solutions gateway and router business and our IoT module businesses where we have the opportunity to provide our customers with subscription-based connectivity services. We believe this is an attractive business for Sierra because we can provide our customers with a fully integrated end-to-end IoT solution, including device, be it module or gateway, together with connectivity services and cloud-based management. We can provide a differentiated offering with a greater edge intelligence, security and integrated device management.In 2018, this business was slightly more than half our revenue. And going forward, we expect to grow this high-margin IoT solutions and service businesses faster than our Embedded Broadband business. In 2019, we expect this segment to grow strongly at over 10% year-over-year, with gross margins in the high 30% and increasing. So in 3 to 4 years, we would target to have a total revenue well in excess of $1 billion, with approximately 60% of the revenue coming from IoT Solutions and Services, with gross profit margins in this business segment being north of 40% and growing. We have a large focus on growing recurring revenue, and our objective is to realize approximately 30% of this segment's revenue from recurring revenue services in 3 to 4 years and growing from there as customers further roll out their IoT solutions.We view the IoT Solutions business as a strong value creator for Sierra with higher gross margins, good growth and valuable recurring revenue and should attract the commensurate rerating as this becomes more apparent. This new business segmentation is a work in progress, and we'll be providing you with more information on this during our Q1 results call in May and planned Investor Day presentations. But I wanted to give you a preview of our direction today.I will turn the call back over to Dave to outline the financial guidance for 2019.
Thanks, Kent. I'll now provide our guidance for full year and first quarter of 2019. For the full year of 2019, we expect revenue to be flat compared to 2018. Within that, in OEM Solutions, we expect a modest year-over-year percentage decline of mid-single digits, driven by factors in 2 major segments. Firstly, in our automotive business, we expect the ramp commencing in Q2 of 2 new design wins, including Volkswagen, to be more than offset the softness overall in this sector, resulting in solid year-over-year automotive growth. This is offset by a decline in our PC OEM business. In Enterprise Solutions, we expect our gateway and router business to grow at a similar rate as the 18% year-over-year growth we realized in 2018, driven by product and go-to-market investments. And in IoT Services, we expect a year-over-year percentage growth rate in the high single-digits, adjusting for the sale of the iTank business at the end of 2018.We expect non-GAAP gross margin to be in the range of 31.5% to 32% for the full year. And as we make investments ahead of the impact of our cost reduction initiatives, we expect our OpEx to increase throughout the year, resulting in full year adjusted EBITDA of approximately $35 million and non-GAAP EPS of approximately $0.30. We estimate our 2019 full year non-GAAP tax rate to be approximately 12%.In the first quarter of 2019, we expect revenue to be in the range of $170 million to $174 million. Our Q1 revenue guidance reflects several important factors in our OEM customer base. Our mobile computing customers are continuing to experience a shortage of Intel CPU processors which, in turn, is impacting demand for our cellular modules in Q1. We are seeing a slowdown in the global auto sector. Consequently, some of our large customers are working down inventory levels in Q1, negatively affecting demand in the quarter compared to Q4. In addition, we are experiencing lower demand from certain networking customers and generally some macroeconomic headwinds. We expect sequential revenue growth in enterprise gateways and IoT services to be relatively flat sequentially from Q4.Our non-GAAP gross margin in Q1 is expected to be in the range of 31.5% to 32%. This range is based primarily on product mix at our OEM Solutions and Enterprise gateways businesses. We expect non-GAAP OpEx in the first quarter to be up slightly compared to Q4. We typically have higher sales and marketing costs in Q1, driven by the timing of major trade conferences and training events. As a result, we expect first quarter adjusted EBITDA to be in the range of $2 million to $4 million and non-GAAP EPS to be in the range of negative $0.02 to negative $0.06. Our Q1 non-GAAP tax rate is expected to be approximately 12%.With that, I'll turn it back to Kent for summary comments.
Thanks, Dave. So as the new CEO, let me recap on the future for Sierra Wireless. We are in an exciting market that we believe has significant growth potential. We believe the acceleration of the IoT market will be led by providing full solutions to enterprise and industrial customers to get their valuable edge data to the cloud and build new revenue streams and to reduce costs. Our IoT Solutions and Services business is of scale today with over $400 million of revenue, 22% recurring revenue and high 30s gross margin. We are targeting growth in this area to exceed 10% in 2019 and to accelerate in future years as our service offerings mature. I reorganized the company, and we are investing to accelerate growth and results here. As presented, as we look at this business 3 to 4 years' out, we would look for it to be over 60% of our $1 billion-plus revenue, to have gross margins north of 40% and growing and with recurring revenue to be approximately 30% and growing.We have a strongly differentiated offer to enable enterprise and industrial customers to improve their time to market, increase their ROI on IoT projects. Our IoT solutions focus is positioned to create strong shareholder value. Our Embedded Broadband segment is expected to have a weak year in 2019 as a result of expected macro headwinds and some missed design cycles, but our customer relationships remain very strong. To enable our transformation, I am focusing on reducing cost by approximately $40 million to $50 million, realigning organizational leadership, disposing of noncore assets and improving overall business predictability. Simultaneously, I intend to lead substantial investment in our IoT solutions capability to accelerate our growth in this area.In conclusion, I'm very excited about the prospects for the company, and I look forward to transforming the business. We have a lot of work to do, and 2019 is an investment year for Sierra Wireless. But I believe we're now on the right path, and we're making the right investments as we enter the next phase of global growth in IoT.Thank you. Chris, we can now open up the conference call for Q&A.
[Operator Instructions] Your first question is from Mike Walkley with Canaccord Genuity.
Maybe just starting with the Embedded Broadband business. Can you help us break out how much PC was in terms of that mix in 2018 and how much it's down in 2019? I'm just trying to connect the dots from some more positive commentary in IoT hardware companies relative to your guidance. I want to see how much PC impacts that relative to the rest of the business on the module side.
Mike, it's Dave. We've got 3 big buckets in the Embedded Broadband -- or in the OEM business, I should say. Automotive would be the larger of the buckets. PC OEM is large, but it's not the largest. But we haven't -- we don't break it out specifically.
Okay. And then just on LPWA, clearly, an investment area. Where do you guys think you are relative to the competition? Do you think you're a little behind and some people are getting earlier start? Or do you feel like that road map's on track? Is that impacting your guidance at all for 2019?
No, we think we're in a very strong position on LPWA. We've rolled out live to customers, we have embedded advanced power management features and we also have our embedded connectivity that we can roll with that service. So we're -- I think it's just early days. Carriers' rollout of LPWAs are not complete yet. In Europe, we'll be focusing on 2G fallback with our LPWA modules, so that we can -- and again, we have some competitive advantages there, using our own 2G IP. So we're strong. And the other major component we're doing that I talked about, the management at the edge, as we have a unique value proposition that is significantly ahead of the market where we embed our device and connectivity along with an ability to do edge processing, which allows customers to get their edge events to the cloud without having to do what would regularly require a lot of integration work, a lot of design work. We have an end-to-end solution that implements quickly. We have one of the early customers on our latest protocols speaking in our sales and marketing conference and talking about how from first devices, they were able to get edge data in 2 hours, and previously they were looking at 2 months to 2 years to be able to make the whole system work. So we're feeling very strongly with LPWA.
Okay. And last question for me, and I'll pass it on. Dave, just on the model. I guess, with auto ramping, is the older OEM Solutions business, I'm not sure if you guys are going to change how you report going forward, but given that business unit kind of they're back into your guidance, I'm getting maybe a mid-25% gross margin for that business. Is that kind of a good way to think about it given change in mix and the lower revenue?
Yes. It might be a little bit more compressed than that, Mike. But you're pretty close.
Your next question is from Thanos Moschopoulos with BMO Capital Markets.
Maybe just expanding on the last question, as we look at the gross margin compression you're anticipating in Q1, is that entirely coming from OEM and are margins expected to be relatively stable in enterprise and services?
Thanos, this is Dave. So OEM will be down, we think, sequentially a little bit, not a huge amount and so will Enterprise gateways business down a little bit. That's more of a short-term customer mix in Enterprise, driven by some more telematics lower-margin gateways than our AirLink gateways. And then we expect an improvement in our gross margin on the services side.
Has the tariff issue been fully resolved at this point in the gateway business?
Close to. We've moved quickly and moved production in Q4 from China to Vietnam. That cost us about $1.1 million in move cost and direct tariffs. There'll be a little bit in Q1. Probably around a $300,000 impact would be the current view. And going into Q3, we will be producing most things in Vietnam that won't be subject to tax -- or tariffs, I should say.
Okay. And in terms of the mobile computing market, should we be looking for recovery in the second half of the year as Intel ships its new chips, I guess, notwithstanding your earlier commentary about market share?
Yes. We have pretty conservative expectations of that, Thanos, in that part of our business. As Kent mentioned, design cycles come and go, and we're also experiencing in near term the Intel CPU shortage. So we're pretty careful in our outlook there.
And remind us, I mean PCM -- sorry, PC OEM margins are higher than the OEM average, are they not?
Yes, they are.
Yes. Okay. And then maybe just one last one for Kent. Maybe it's too early to comment, but you started shipping some Ready-to-Connect modules in December. Any early feedback, any positive proof points as far as attach rate for services? Or is it just too early to really make any conclusion at this point?
Well, it's still very early. We have a number of design wins, and the customer feedback has been very strong. So the design wins we have right now are 100% attach rate. We are -- to get to the overall attach rate, we need to have more of our modules lined up, and we're working to sell more broadly across and see which customers and which applications they want the end-to-end solution from us and which customers want to be able to manage their carrier connectivity discreetly. So those -- we will be -- we're doing investor meetings in May. We'll talk more about our services business, but we're not ready to forecast attach rates yet. Although that is a key and important metric that I'll be watching.
Your next question is from Steven Li with Raymond James.
Kent, Dave, a few questions. Dave, can you repeat how much growth you're expecting for OEM enterprise and IoT in 2019? I missed that part.
Sure. For the OEM business, and this refers to the existing business unit, not the new segmentation that we're working on, but for the OEM business, we are expecting probably a mid-single-digit decline year-over-year. And enterprise, we're expecting -- the Enterprise Solutions and gateways, we expect that to be growing at or above the 18% year-over-year growth that we realized in this year -- in 2018. And with IoT Services, if you exclude the impact of the iTank sale in 2018, we expect that to grow in the high single-digits year-over-year.
Okay. And so on the OEM, so given Volkswagen's revamping, so does that mean just the delta there is just the macro factors you've talked about in auto that's responsible for it?
It's that. So it's -- we do expect growth in automotive, but it's the ramp of Volkswagen and another new program that's offsetting -- more than offsetting the headwinds in the overall industry. But we also expect our PC OEM business to decline as well.
Right, right. Okay. And on that, the PC OEM, were these share losses unexpected? And why would you have to wait for the 5G cycle to regain share?
Well, it's a function of when we design products, we have to make some choices. And so we've designed for servicing the automotive business, which made us a little less competitive in the servicing the PC OEM capabilities. So yes, those design wins will roll off and -- but we'll be hard at it developing new 5G product, which we expect to have a shot at reearning those design wins. And then we'll also continue a stable of smaller PC OEMs throughout the piece as well.
Steven, it's Kent here. On the PC OEM marketplace, in Sierra Wireless' history, there's been other design cycle losses, and then those customers have been won back. So we've been a strong player there. But as I said, I'm disappointed from how some of that has played out. And our plans for the year ahead is a strong work on 5G and to be back winning our leadership position in those market places. In terms of your question of why wait for 5G, so you essentially have a particular technology that's going to go with a particular product line. And once it's designed in, there's typically no change to that. The next interface comes along for later computer product lines, and that's the way that market goes. It's, therefore, lumpy, which has caused challenges in the past. And it is part of our focus on growing our IoT Solutions business with high recurring revenue and much more predictability.
Okay, that's helpful. And on the restructuring, can you quantify the cash impact? How much restructuring disbursements should we expect in 2019?
Steven, it's Dave. We're working through various plans right now. So as we get closer to working on those initiatives, we'll be clear about that.
And the time frame for the $40 million to $50 million cost reduction, is that exiting 2019?
It's actually a bit of a longer horizon, 18 to 24 months, Steven.
18 to 24, okay. And then last question for me, which quarter would be the bottom for gross margin in 2019?
You can see that our Q1 gross margin range is similar to our full year, so I think it will bounce around in that range a bit.
Your next question is from Scott Searle with Roth Capital.
Just to follow up quickly on the cost reduction of the $40 million to $50 million, as you're looking out 18 to 24 months. It's -- clearly, it's certainly coming in, in the 2020 time frame where it impacts you. But in the interim, OpEx is actually going to be increasing as you're making that investment into software, into 5G, into LPWA. Is that correct? Over the next couple of quarters, besides the seasonality that we see in the first half, that number does -- on an annual basis, '19 is still going to be higher than 2018 given your sales and your gross margin guidance. Is that correct?
Yes, Scott, you stated that very well. We are investing to drive services growth and drive some technology investments, and that will increase OpEx in 2019 while we are hard at it taking cost out of the business as well.
Just a clarification. We manage those very discreetly. So we're very clear on where we're taking cost out with efficiency and then very discreet in our investments to drive future growth.
Got you. And just a couple of clarifications. In terms of the PC OEM share loss, is -- do you see the segment then going to near 0 over the next 18 to 24 months until we're waiting for a 5G cycle to start? And will you be changing reporting segments as well, given how you were kind of breaking out sales in your earlier comments?
To the first question, Scott, on the PC OEM segment, no, we've got many customers there. So we'll -- we've got Tier 1s and Tier 2s, and so we expect to continue to be a meaningful supplier to some of those customers. But others will go away as the design wins end, and we'll be pitching that business with new 5G product. With respect to segmentation, we're kind of a work in progress. We shared our thoughts with you on the 2 segments, Embedded Broadband and IoT Solutions and Services. We'll be refining that over the next quarter. And then when we report in Q1, we'll be very clear on any new segmentation, if we've made some determination there.
Got you. And if you could, as well, just restate the attach rates that you were talking about for device-to-cloud and Ready-to-Connect with other software and SaaS-based services, what was the target that you're driving to over the next 3 to 5 years?
We didn't talk about attach rate targets. We said that IoT Solutions today would look like 22% recurring revenue, and we'll look to continually grow that. And within the 3 to 4-year cycle mentioned, we would be at 30% and growing recurring revenue. So that's the focus we have. The attach rate is something that we'll speak to as we build more experience in that area.
Got you. And just lastly, if I could. Your thoughts in terms of how big will LPWA be as you're exiting calendar '19, your thoughts on 3G sunsetting. And lastly, Kent, a lot of what you're talking about in terms of transforming the organization is really a larger investment in software, whether it's edge processing, it's some of the stuff that you're doing in Ready-to-Connect and, otherwise, in device-to-cloud strategies, right? So it's really a DNA shift, right, in terms of the organization. I'd just love to get a little bit more of your thoughts in terms of how you're approaching it and managing that because it is a major shift in terms of where the organization has been in the past.
So I think that on the transformation of the business and the size of the LPWA market, so we look at all of the perspectives on LPWA, and it talks about shipping billions of devices, I mentioned hundreds of millions of LPWA devices. We're seeing lots of appetite. Again, I draw attention to the fact that today, plus-70% of IoT projects fail because the challenge for the OEM or enterprise, to be able to get that edge data in a usable fashion without a lot of complexity, is difficult. So our -- we have been making investments already. We have -- if you go to our website, you'll see a product called Octave, which is very advanced edge processing and end-to-end solution. And it's solutions like that we're accelerating. And that's -- we're having tremendous response to that from customers and from partners. In terms of the investment in software, we have been building our cloud and the software side of the business for some time. But we are working to accelerate that with 3 discrete R&D divisions before we were somewhat dilutive in doing that and under a one centralized approach now. We are putting more emphasis in that area. I think the DNA shift is as critical within our go-to-market side and being able to sell a complete solution to customers versus just hardware. And so I've done significant reorganization in our go-to-market resources to be able to have one global sales team with the strong incentive and training to help drive services and supported by our global solutions capability to be able to go out there and make sure the customer is getting the best product and getting connected and that we're managing that ongoing connectivity. So it's been a work on both sides, both on the R&D and on the go-to-market.
And then Scott, on your 3G sunset, we're -- we've already seen quite a substantial rolling off of 3G business. It's down to about 14% of our technology mix at the end of last year. So yes, it will continue to decline, but I think we've seen the big trajectory behind us so far.
Your next question is from Paul Steep with Scotia Capital.
David, can you just give us a sense of how we should think about that savings split between the cost of goods sold and operating expenses?
Yes, Scott, just at this point, think of it at the contribution margin line, and we'll continue to refine programs over both COGS and OpEx.
Your next question is from Todd Coupland with CIBC Markets.
I have one OpEx question and then a couple of follow-ups. So if $56 million rising a little bit is baseline, once you get through the investment period, would you anticipate that, that is actually going to fall? What -- materially, I guess, $10 million to $12 million a quarter would be the $40 million to $50 million. I guess, some may go in COGS, but is that how you're thinking about it beyond 2019?
Certainly, beyond -- 2019 is a big investment year for us, Todd. So you'll see OpEx rise. I think after that, we can start to garner more of the savings to the bottom line, but I'm not going to make a prediction at this point.
Yes, there's a strong emphasis on COGS reduction as well as OpEx reduction. So on your quick math there, you need to take into account that some of those savings we're going after are in the COGS area. And then the rest in OpEx, you'll see flowing through over the next 18 to 24 months to get the complete savings target we have into the numbers.
And when you think about your base of modules that you ship a year, $20 million a year or more or less, how much of that would you view to be -- I guess, you can't really target in terms of recurring revenue potential, so what's really the baseline that you need to bring up to $40 million? How should we think about that?
Well, look, if you look at the segmentation I mentioned of Embedded Broadband and IoT Solutions, Embedded Broadband is a little less than half of our revenue today. And that's an area where it's difficult to drive attach to. Our IoT Solutions is over half of our revenue, and that's where we're focusing our attach on. And we expect it to be the faster-growing part of our business.
And then just lastly, I know it's early on your connect business, but what are some sort of real examples on some of the design wins that you would like to call out? Give us a sense of the $10 per year payers of that product?
Yes. I think there's quite a few segments that -- so when you say $10 per year, that would be slightly higher, and it's probably in LTE module segment. LPWA will bring revenue expectations down more in the dollar type of range. I mentioned 2 examples in it, our design win list that we have and the customers that are in process with us is extensive but haven't cleared many of those to announce the names. We've been making announcements most weeks about a new service connect customer, and we'll continue to be doing so. We have some exciting customers to talk about and driving those solutions, and they are names that you recognize. But got to clear it with customers before I call them out.
Your next question is from Paul Treiber with RBC Capital Markets.
Kent, when you were at the board and then when you first took on the role, did you anticipate the magnitude of this transition or restructuring? Or was it something that you came across as you dug into the role?
Paul, well, I think that from November to now, there has been some significant weakening in PC OEM and automotive numbers for the year and described how those lead to a down year in that segment part of the market. The cost restructure and work we're doing, I think, is good business practice to get lean and efficient and work to drive money to the bottom line. The degree to which driving investment in to succeed in the future part of this market has become more apparent, as I said, talking to customers, suppliers and employees about how we're going to make the transformation happen. So Jack Welch once talked about you need to eat today and dream tomorrow, and it's getting that balance right. We could have just cut cost and improve the profitability and not be ready to win for those big market segments that's ahead. So I'm very excited about the IoT solutions opportunity. The IoT market is poised for its next leg of growth up, and we're very well positioned to do that. But we have to be strong. On the question about the software shift but also our capability of selling and servicing customers, so the -- from my perspective as CEO versus board member, it is more clear to me the exact components of the lift that we have to make happen. The revenue shortfall in the Embedded Broadband this year has made that all somewhat more challenging. And so I wanted to lay out the vision here that we are -- we have a strong and growing IoT Solutions business with strong gross margins today, good top line growth and improving recurring revenue. And so that is the part of the business that we're working to accelerate. And we think that when you look at businesses that would be of that scale with that degree of recurring revenue, they're highly valued. And so that's the investment part. We see a very strong building of shareholder value with that, and so the investment's being contemplated and reviewed extensively and done with that in mind.
And then looking at the Embedded Broadband business, the -- I mean when you're speaking about mobile computing versus automotive, it felt like you would have preferred that the company prioritized mobile computing over automotive. Was that a fair characterization? And then more broadly, just what's your view on the automotive business longer term?
So 2 questions there. The -- on my -- I would rather have more revenue in 2019. So if that's an answer to the question, I'll leave it at that. You can't do everything, but I think that you have to work on prioritizing. I've made quite a few changes to our overall sales force leadership and our ability to design and forecast. And I'm making sure that we're funding our road map so that we can be investing in the products that we think are going to be important in the market to grow our future revenue. So there were some decisions made that is going to result in some short-term revenue weakness in 2019 in the embedded side of the business, but we're absorbing that and moving on from that. But I would rather not have a dip in PC OEM, but -- and we're just laying out what's going on in the marketplace. And the dip I would add, too, has been -- the Intel shortage has really been a big moving part in terms of our volume as we look at what's going on in Q1 into Q2. So it has been a meaningful impact that lowered our expectations for revenue from that sector.
And just on the longer-term question on automotive, how do you think about that business?
So the key auto players are looking, and we're responding to their request for information about 5G in every car. And so we're working through those sorts of programs. So it's a segment that's going rapidly towards ubiquitous penetration of connectivity. So we've -- we're the leading global market share player in that segment. It's -- the good aspects of it are that they're typically 5-year design awards, so we're able to look at the NPV from those auto awards. The nature of them is that they are generally, for us, low gross margin in the early period and increasing gross margin later as we have the opportunity with time and volume to reduce our component costs. So as we have some strong design wins starting to scale in 2019, that hurts our gross margin. But it's not a business that we have to compete for every year, it's longer-term design cycles and, as I mentioned, the $1.1 billion of revenue that we see coming from that automotive group. The next real design cycles will be around 5G, and that's driving capability and penetration in auto further. So I don't know if that answers your question on what I think about auto.
And our next question comes from the line of Richard Tse from National Bank Financial.
Just 2 quick ones here for me. David, if you take out the guidance for Q1, the implied guidance for the remainder of the year, call it, like $207 million on average per quarter, can you maybe sort of share with us the linearity of that ramp? And that's, I think, sort of the highest we've seen on record for you at $207 million, so is that largely coming from VW here?
That's certainly going to be a factor, Richard, starting next quarter. We're -- I mean, to be clear, we are shipping now, but the big ramp is coming on in Q2. And then also in automotive, we've got a situation where some of our big customers are winding down their inventory. Some of them have their year-ends at March 31, so they're being very careful with their ordering patterns. And we expect that to recover in Q2 as well with the ramp. And then we've got ramping elsewhere in our business such as gateways, aspects of Industrial IoT and the services business.
Okay. And for Kent, I appreciate the comments around the investment. Should we consider that investment to be sort of all organically driven? Or are you contemplating acquisitions with that?
No, that's all organic today. As I mentioned previously, we don't see the need to buy in anymore MVNO or service capability. We believe we're at a sufficient scale, and we'll grow that scale organically. Our differentiated market-leading solutions is an area that we have some of the best people in the world working on those, and we're continuing to expand in those areas. So it's organic.
Next question comes from the line David Gearhart, First Analyst (sic) [ First Analysis.
Just really quick, on the iTank sale as it relates to kind of a broader theme. iTank was proprietary hardware with a proprietary application. So just wondering how you're thinking about owning the entire solution from a module or a gateway kind of infrastructure platform, connectivity and application? Are you moving away from actually owning the application layer and your thoughts there? And then also Numerex had a few other businesses, including the offender monitor application. Just wondering if that is still being supported, going to be supported? Or is it still being considered for potential divestiture as well?
Let me -- this is Kent here. Let me start by talking about the big market segments we're going after. So when we look at what we call the industrial IoT edge, so every piece of industrial equipment over $10,000 should be connected to the cloud. Some infrastructure smart city and mobile IoT edge, every mobile asset of over $5,000 should be connected to the cloud. So those 3 segments of the marketplace are broad. They -- we'll have some vertical aspects of it, but it can mostly be done in software. And those are the areas that we're putting our emphasis. Some markets like iTank were not large, we weren't at scale in that business. As Dave mentioned, we were losing money in that area. And so we don't want to invest in that sort of discrete small growth area, we're investing into the big market segments and in those growth areas. So no comments in other aspects of our business, I think, at this point of time, but that discipline is what we're trying to apply throughout.
We have no further questions at this time. I will now turn the call back over to the presenters.
Okay. Well, thank you very much to everybody. Dave, myself, Dave Climie are available for follow-up calls and discussions. We have -- as I said, I'm very excited about the future opportunities in the business, look forward to that dialogue. And we also are planning Investor Day meetings in North America and Europe after our results in May. So thank you very much, and we'll be speaking to many of you shortly.
This concludes today's conference call. You may now disconnect.