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Ladies and gentlemen, thank you for standing by, and welcome to the Sierra Wireless Incorporated Fourth Quarter 2020 Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, David Climie, Vice President 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 are Kent Thexton, President and CEO; and Sam Cochrane, our CFO. 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. Kent will provide his corporate update, and Sam will provide a detailed review of our Q4 and year-end 2020 results, followed by 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 securities laws. These statements include our strategy, goals, objectives, 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 of 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 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 Kent for his corporate update.
Thanks, David. I'll start my prepared remarks today with some highlights from the fourth quarter as well as some brief comments on full year 2020. We will be discussing our continuing operations on today's call with the automotive business line under discontinued operations.As you are aware, we completed the sale of the automotive product line in November, and as a result, our balance sheet has been significantly strengthened. Sam will review this in more detail in his summary of the fourth quarter results and balance sheet.So let's turn to some of the highlights in Q4. Total revenue in the fourth quarter was $120.5 million, up sequentially 6.3% from Q3 and ahead of Street consensus. Our business transformation is proceeding well, with 3 quarters of sequential revenue growth. I am pleased to see this improvement despite the tight component supply situation in the industry and the impact of the COVID-19 pandemic globally.Q4 recurring and other service revenue was $32.6 million, up 25.1% year-over-year and up 9.4% sequentially as our continued focus on IoT Solutions is showing improving results. Looking at service wins in Q4, as measured by LTARR, or long-term annual recurring revenue, we achieved record LTARR wins, totaling $46.3 million up 40% sequentially. For full year 2020, we secured $140 million in LTARR wins, an increase of 54% compared to 2019. This result shows the success of our transformation efforts to win in the market with bundled solutions, delivering faster time to market for our customers and sticky, high-margin recurring revenue for Sierra Wireless.In Q4, our global sales team continued to secure IoT solutions wins with new and existing customers. So I'd like to share a few examples from Q4.The first win is with a leading U.S.-based designer and manufacturer of gateway systems for the commercial and residential markets. They needed an IoT solution that enabled them to do remote monitoring and control of both the entry and exit points on commercial properties. They also required cellular communications to support audio/video access for their gate openers and overhead doors used in apartment buildings and on campuses.We are providing them with a device-to-cloud solution using our ready-to-connect embedded modules that is bundled with the connectivity services package. The hardware value of this design win with this global leader is expected to be $1.4 million, and the services LTARR is expected to be approximately $700,000. Another new customer we signed up in Q4 is a global power systems company, focused on improving the efficiencies of electrical motors for the industrial energy market. This customer is gathering real-time data 24/7 from their machines so that they could monitor their equipment, improve system performance and provide preventative maintenance. The solution required a single vendor with an end-to-end solution, so we're providing our LX40 gateway, cloud platform and the global connectivity service. The LTARR associated with this design win is expected to be $2.9 million and the hardware value of approximately $1.6 million. And the last example in Q4 is a design win that we signed with the help of Microsoft, and a good example of our partnership work with both Microsoft and Azure. The customer, who came to us through the Azure IoT team, is a global industrial company that is looking to monitor its assets 24/7 for predictive maintenance services. Initial project include their [indiscernible] video orchestration software solution with deployment to about 10,000 industrial assets and scaling to significantly more devices and recurring revenue in time. We see the industrial IoT sector really picking up, and we are pleased to have partnered with Microsoft on securing this design win and working our strong industrial IoT pipeline together. Now let's quickly look at some company highlights in 2020. The recurring and other service revenue increased 18% year-over-year in 2020, and we ended the year with more than 4 million connected devices. The acquisition of M2M in Australia has been successful, and our recurring revenue is growing strongly in the ANZ markets.Globally, our focus on selling solutions and growing recurring and other services revenue has made great progress, and we are winning in the competitive market. I'm very pleased with the $140 million in LTARR that was generated last year, on top of the $91 million in LTARR from the previous year. This sets up the company well as we remain very focused on our target of achieving $200 million run rate of recurring and other services by the end of Q2 2022 and $400 million by the end of Q2 2024. In terms of new product offerings in 2020, we successfully launched our 5G embedded module during Q4. We are certifying our 5G gateways and routers globally, and our 5G MG90 router was recently certified on T-Mobile's U.S. network and will be launching soon.Our global sales teams have secured numerous design wins for 5G modules last year with key long-term enterprise customers. I'm very excited about the growth path for 5G low-latency applications in areas including enterprise networking, public transit, asset monitoring, health care and public safety. I'm also pleased that we strengthened our executive management team in 2020 by hiring Sam Cochrane; Steve Harmon, our Senior Vice President of Americas; and most recently, James Armstrong, who is now running our Enterprise Solutions business as Senior Vice President. James has great experience from Spirent Communications and a strong wireless experience with a PhD in Electrical Engineering from Purdue. So we're glad to have him on the team as well. Before I turn the call over to Sam, I would like to point out that starting in the first quarter of 2021, we'll be moving to 2 new reporting segments. With the sale of our automotive product line in mid-November last year, it's an opportune time for us to have 2 strong pillars of growth: one, focused on IoT solutions and the other focused on enterprise solutions.The Enterprise Solutions reporting segment will include AirLink cellular routers and gateways, our IoT applications business for monitoring and asset tracking and our enterprise connectivity solutions and software. Together, this segment generated $142 million of revenue in 2020, with gross margins of 50.5%. We doubled our enterprise pipeline in 2020, and we are well positioned for growth in this attractive and growing market.The IoT Solutions reporting segment will include our portfolio of cellular modules from LPWA through to our high-speed embedded 5G broadband modules as well as our IoT connectivity solutions, services and software. This segment generated $307 million in 2020, and we are highly differentiated with our complete device-to-cloud offering.The total addressable market for IoT solutions is $10 billion to $20 billion, and we are seeing success with the industrial IoT market as the industrial leaders start to connect and digitize their machines and assets. We are well positioned for solid growth as our customers deploy cellular modules, bundled with connectivity services for simple and scalable IoT solutions. Overall, we remain very focused on delivering our innovative device-to-cloud solutions that are generating higher margin, subscription-based recurring revenue.With that, I will now pass it over to Sam for his review and comments on the fourth quarter and year-end results.
Thank you, Kent. Good afternoon, everyone.As a reminder, our fourth quarter financial results are reported 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 the IR page of our website. Before I begin with the review of our quarterly results, I'd like to point out that our fourth quarter 2020 financial statements are based on continuing operations, and we have segregated the automotive business with the sales [ completing ] on November 18 as discontinued. We have included in the notes to our Q4 financial statements information on a GAAP basis regarding the automotive business, and we'll provide additional information in our MD&A.So now let me turn to our continuing operations and comment on the fourth quarter and full year 2020. Total revenue in Q4 from continuing operations was $120.5 million, a decrease of 3.7% compared to the same period last year. Non-GAAP gross margin in the fourth quarter was 36.1%, up compared to 35.8% in the fourth quarter last year. In Q4, we continued our focus on rightsizing the business and reducing OpEx. As a result, our non-GAAP operating expense were $50.1 million in the quarter. We expect this OpEx run rate to continue to decrease into 2021.Non-GAAP adjusted EBITDA in Q4 was negative $2.9 million compared to negative $3.2 million the prior year. For the full year 2020, total revenue from continuing operations was $448.6 million compared to $547.3 million. The lower revenue in 2020 is primarily attributable to the impact of the COVID-19 pandemic, the tight component supply environment and the decline in mobile computing revenues with the loss of Dell/Lenovo design wins 2 years ago.Adjusted EBITDA in 2020 was negative $34.9 million compared to $9.8 million in 2019.Now let's take a quick look at Q4 2020 on a year-over-year basis. Revenue in the IoT Solutions segment was $87.6 million, down slightly by 3.6% year-over-year. Within our IoT Solutions segment, recurring and other services revenue was $32.6 million, up 25.1% year-over-year, driven by increased customer usage and growth in the number of connected devices.Recurring and other services revenue represented 27.1% of our total revenue in Q4. The growth in recurring revenue was offset by lower hardware revenue, primarily due to the impact of the global pandemic and some supply-related constraints in the quarter.Revenue in the Embedded Broadband segment was $32.9 million, lower by 3.8% year-over-year, primarily due to the decline in mobile computing revenues with the loss of Dell/Lenovo design wins 2 years ago. This is the last quarter of the Dell/Lenovo design loss impact, so there is no impact related to that going forward.Total gross margin was $43.5 million or 36.1% in Q4 compared to 35.8% the prior year. The increase year-over-year was due to improved margins in IoT solutions, up 1.6% to 38.6% due to mix, partially offset by a decline in Embedded Broadband gross margin at 29.5% due to lower mobile computing gross margins from the previously discussed design losses. Taking a look at Q4 on a sequential basis. Revenue in IoT Solutions segment increased $8.5 million or 10.7% compared to the prior quarter, with enterprise networking gateway and router showing improvement as we are converting more of our increased pipeline from the last quarter. Additionally, recurring and other services revenue increased 9.4% sequentially in Q4.Revenue in the Embedded Broadband segment decreased $1.4 million, or 4.1% sequentially, primarily due to lower mobile computing revenue total gross margin was up $4.1 million in Q4. The sequential increase was due to mix improvement in both IoT Solutions and Embedded Broadband.Operating expenses declined 2.1% sequentially to $50.1 million in Q4, and adjusted EBITDA was negative $2.9 million, an improvement compared to negative $7.1 million in Q3. Moving to our cash position. Cash flow from operations in Q4 was $0.7 million and CapEx was $7.9 million. The quarterly CapEx was higher than normal in Q4 due to equipment replacement for 5G development that was required in Asia following the divestiture of the automotive business. Net proceeds from the sale of the automotive business was $144.2 million. And during the quarter, we paid down our credit facility of $34.4 million.We also spent $3.5 million acquiring the M2M business that is based in New Zealand, extending our IoT services business into that new market.As a result of these activities, we had an increase of $99.4 million in cash at the end of the quarter, finishing the year with $171.4 million of cash on the balance sheet.As we look to the first quarter of 2021, we will be consuming approximately $20 million in cash due to 3 main factors. One, we need to increase capacity and inventory to combat the current shortage in components. Two, we have restructuring outflows we are incurring as we improve our operating efficiency. And three, we also have some onetime working capital adjustments associated with the auto sale occurring in the first quarter of this year.Before I move on to guidance for the first quarter, I would just like to say a few words about the new segmentation we'll be reporting on in Q1. In today's release, we have included a table that shows the revenue and gross margin for the 2 new segments. The Enterprise Solutions segment includes gateways and routers, IoT applications such as offender monitoring, security and asset tracking as well as enterprise connectivity services, our cloud management platform, software and services that are all related to our gateway and router business. In 2020, this business generated $141.7 million in revenue at a gross margin of 50.5%. In Q4, it had $38.9 million in revenue and a gross margin of 51.5%. The IoT Solutions segment includes our IoT cellular modules and Embedded Broadband modules as well as our IoT connectivity services, cloud management platform, software and services that are all related to our IoT module business. In 2020, this business generated $306.9 million in revenue at a gross margin of 28.4%. In Q4, it had $81.6 million revenue and gross margin of 28.6%. We'll be providing more information on each segment at the end of the first quarter. Now for our outlook. The impact of the COVID-19 pandemic on our global business continues to remain uncertain, especially as it relates to the current tight supply chain environment. While we continue to evaluate the effects of COVID-19 on our business, the overall severity and duration of adverse impacts related to COVID-19 on our business, financial condition, cash flows and operating results for the first quarter 2021 and beyond cannot be reasonably estimated at that time. The ultimate size of the impact of the COVID-19 pandemic on our business will depend on future developments, which cannot be currently predicted. Regarding the first quarter of 2021, we expect our revenue to be in line with Street consensus of $109.9 million. There is strong demand for our products and services in the first quarter, and we have secured hardware orders and recurring revenues at approximately 15% above current Street consensus for Q1 2021. However, we are facing a very tight global supply chain environment that's constraining our ability to source components and fully deliver to this level of demand.Kent and I continue working closely with all our suppliers and manufacturing partners to close the gap. We appreciate all the hard work being done across our supply chain, from our staff, suppliers and manufacturing partners who are working with us tirelessly to support our customers' orders, which service critical application. That ends my prepared remarks today. Operator, I would now like to open the call for questions.
[Operator Instructions] Your first question comes from the line of Josh Nichols from B. Riley.
Good to see the continued sequential improvement on the top line as well as the bottom line improvement that we're seeing here. I wanted to ask, you talked a little bit about the first quarter. But looking more at the OpEx and the cost savings initiatives, could you talk about where we stand for the $25 million to $30 million? And any kind of outlook you could provide as far as the anticipated turn to kind of sustainable profitability from like a cash burn or EBITDA perspective.
Sure, Josh. Thanks for the question. It's Kent Thexton here. I'll ask Sam to talk about the OpEx levels. But yes, we're making -- the overall business model progress is good and both growing at top line and then making sure our cost structure is lined up. So Sam, do you want to talk to the $25 million to $30 million cost reductions?
Yes. Thank you for your question. So headcount is down to levels around 1,040, so 1,040. That's down about 20% from where we came into the year. So very good progress is being made there, and we're on track for those targets.
And then if you could provide a little bit more color, I know getting the timing of the 5G ramp, right, has been a little bit difficult. But it seems like you're making good progress on there. How are you doing as far as shipments? And any type of targets as far as what you could do on that front and kind of a margin accretion potential as that ramps up a little bit?
Yes. It's Kent here. So we are very excited about 5G, as I said in my comments. We've done very well in securing design wins with customers looking to be early in 5G. We're in that early-stage where the demand levels are not fully certain. We will be starting to ship products to many customers. What we've seen in other iterations, 3G and 4G, and I'll speak to 4G is the -- you start to get deployments. And then as it starts to mature, you just really start to see the volumes ramp. And we expect that to happen similarly with 5G. We've been early with the technology. We've got a lot of very positive feedback from the market, both from customers and carriers. And those design slots are highly valuable. They -- when you win a design slot, you're in with those customers for multiple years. So we don't expect that 2021 is going to be a significant volume of 5G. It's going to be early stages of the ramp, and we'll continue to accelerate as we move into 2022. So an important long-term value step for us, but not great clarity on the volume of 5G yet in 2021.
Last question for me, then I'll pass the baton here.Clearly, it looks like 1Q demand is coming in materially stronger than what kind of the Street had thought. Obviously, there's some near-term component shortage issues. But how long do you think it will take to resolve those? And if you are able to get those resolved over the next quarter or 2, fair to assume that, that may imply a stronger second half than maybe the Street is anticipating in the numbers today?
Well, I think the supply challenges, you will have seen across the board. And I think that those are going to be with us for most of the year. The silicon shortages are challenging. So I think that that's going to be one of the elements that we deal with. We are pleased to see our work is increasing orders. Our demand signals are strong. Some of our existing customers increasing what they're looking to pertain to get from us. And at the same time, we talked last year about our increasing win rates, and our overall increase in design wins and some of those starting to flow through. So we're not providing guidance. And so I wouldn't work to change the view at this point in time with those levels of uncertainties. But the 15% above consensus of orders that we presented shows that, yes, we're pleased with the demand side that we're seeing, both for hardware and for our recurring revenue business.
Your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets.
Kent, can we go a little bit more on the demand environment? So in terms of the strengthening demand that you're seeing, is it primarily macro-driven recovery? Or are there any specific verticals or segments that especially stand out as you look at the demand recovery?
Thanos, yes, good to speak with you. So we've talked about a few things. So we've had -- and I'll talk about our 2 segments now. So we've had a big focus on what we're doing in the enterprise market. And so we're seeing good progress in our enterprise business, our overall gateway sales, inclusive of our software. And so that is something that we will -- we have been investing in. We've been growing partnerships, and we expect that that part of that market will continue. I think there is -- how much of that that are not as related to the economy, but we're in areas of public safety and industrial areas that are just requiring this high-end connectivity, our ruggedized gateways that are serving the needs of that market. Secondly, on the IoT solutions side of the market, I think that there's a big macro trend of industrial IoT is increasing. The one example I talked about with Microsoft is an example of a very large $19 billion company that's working to digitize their assets out in the marketplace. So as we start to see those, those are sort of long-term growth trends. On the economic recovery side, or recovering from impacts of COVID, some of our customers in spaces like smart metering are seeing increased deployments overall. And part of that can be driven by -- look to be able to automate everything and not have to have as many human touch products. So that -- those demand requirements are great in the current environment of shortages. It's challenging to ramp up further. And as a matter of fact, just even committed products are hard work to hang on to in this environment. But our team has been working exceptionally hard, been making good progress with our suppliers to continue to get maximum visibility so we can communicate with our customers on what and when we can deliver. But we see a good market as we move forward.
Great. That's helpful. And you provided a revenue outlook for the coming quarter, but not an earnings outlook. Is that a function of the fact there's a lot of moving parts with supply constraints and infrastructure and so forth? Or what would you say as far as how the Street is thinking about earnings relative to revenues for the same quarter?
Yes. I'll ask Sam to comment in a minute. But we basically decided to not provide guidance because of the great uncertainty in the supply chain side.So we wanted to share that we're comfortable, we're in line with the consensus number and our demand exceeds that. How much product we can get through the factory and ship will then directly affect our profitability levels. As Sam said, we have -- we're on-track for the OpEx savings that we talked about.And so the profitability side can be pieced together. It's really about the volume that we're going to be able to ship due to the parts constraints. But Sam, do you want to comment on that?
Yes, Kent. That's correct. We've got great line of sight into the OpEx number. The big uncertainty is in revenue and then margin on mix. There's still some uncertainty about which parts come in. And as you know, there's a big gross margin difference between enterprise products and modules. So until we get better visibility into our supply chain, quite honestly, it's hard to give more granular guidance.
Okay. Makes sense. And finally, you mentioned the deal win through the Microsoft channel, which I thought was interesting. More broadly, can you speak about, I guess, how that's been shaping up as a channel for you and the pipeline that -- to bring to the table?
Yes. We announced the Microsoft partnership some time back, and it takes a while in big organizations, I think, to get engagement. This deal is important because it's a next tier up customer and a good proof point as we work to drive more strongly. I was recently talking with the Microsoft Head of Partnerships, and we reviewed this as a good catalyst for more business together. So our pipeline with Microsoft has been growing, and as the sales force has become more familiar with the opportunity in the product. And the ability to get more edge data into Azure, we'll see continued progress with that. So it was a good step forward and more to come.
Your next question comes from the line of Scott Searle from ROTH Capital.
Kent, first off, I wanted to wish you best of luck and congratulations on your retirement. I know we're a quarter out from that, but I just wanted to publicly throw that out.
Thank you.
And just to clarify, on the upside demand of 15%, that is for the entire business, is that correct? So in a normalized environment where we're not component constrained, you're looking at $125 million versus $109 million, $110 million. Is that correct? Or is there one segment of the business or 2 segments of the business that are being excluded from that upside number?
No, you have that correct in terms of the order volume that we have seen. We -- in many quarters, we might have small amounts of supply constraints that would fit into there. It's just exceptionally large this quarter. So -- but that is -- we wanted to share the demand view so that while we're saying we're in line with consensus, we wanted to reflect what's going on from the sales side progress with our business.
Got you. And just in terms of the realignment and reporting segments of the businesses, Enterprise Solutions. It sounds like is everything within that category now tied to an enterprise gateway or router? It wasn't clear to me because I think you mentioned some asset tracking applications as well, but it sounds like some industrial IoT modules are in the IoT Solutions business. So I want to kind of clarify, in terms of how that's being reported. Is this basically going to look more like a cradle point type of segment in terms of the router gateway and recurring component that goes along with it?
Yes. Good question, Scott. So the majority of our enterprise segment is our gateways. And the recurring revenue, software support and maintenance that goes along with them. We've also included in our enterprise segment, what we call our IoT applications business. And those were businesses that we originally acquired from Numerex, includes asset tracking, prisoner monitoring and home security. And so those businesses have many similar dimensions to our enterprise business, similar strong gross margin profile and strong recurring revenue dimensions to them. So it's majority gateways and attached software plus our IoT applications business. That's our enterprise.
Very helpful. I don't suppose there's any additional color that you could put with that in terms of the number of units that are under management. I think you said, overall, there were 4 million units, but now that's spread across the 2 business segments.How many of those are tied to enterprise solutions? And is there a larger recurring revenue component that goes along with it because of what you're talking about enterprise-class gateways and routers?
We are not providing a breakout of our attachment rates by segment at this point in time. However, majority of our connectivity business is in IoT solutions. And more of the enterprise side is the attachment of our cloud software. Device management is important maintenance for our gateways.
Got you. And going forward, are you going to continue to report your total recurring revenue then that's spread across those 2 segments? Or does that kind of go away now, we’re just strictly with those 2 segments?
No, we'll be reporting the total services and other recurring revenues as a total of the whole business on a continued basis. We think that's an important metric.
Okay. And lastly, if I could, just wondering if you're seeing any sort of uptick in business as we get to the 3G end-of-life across a couple of networks in North America. Have you seen any sort of pickup on that front? And maybe as well, any sort of commentary or thoughts that you're seeing related to CBRS that couples, I think, probably pretty well with what's going on in Enterprise Solutions, but it’s still early on that front. I'd love to get any color and thoughts on that front.
So on the -- let me answer the 3G question first. So I think there's been a few false dawns on that. They've been delayed -- deadlines and delays.So I think a lot of 3G upgrade activity has happened. We still have some devices that we'll continue to upgrade, going forward. And that's just in the American market. In Europe, they haven't announced sunset dates, and there's still quite a bit of 2G going on in Europe, and we -- that migration path will happen later. So I think that it's more about as customers will start to be -- the predominant technology now is 4G, and customers are going to look to future-proof themselves by upgrading to 5G, and that will be the trend that we're looking to start happening through the year. And I'm sorry, Scott, what was your second question?
Related to CBRS, if you're seeing any sort of early interest in demand from that, particularly on the enterprise solutions front.
Yes. Yes, private networks, CBRS. Yes, we're very keen on CBRS. We have seen increased demand for that. Our gateways operate on public network frequencies and CBRS frequencies. And so we've seen utilities, municipalities, other customers are interested in CBRS.We've talked about our partnership with Motorola. They're very active in CBRS, and we provide gateways to help them with those product areas. And so we think that we're still in the early innings of CBRS rollouts. A lot of frequencies have been acquired, and lots of interest in adding private network capability in addition to public. Our devices have the benefit of a single management platform to allow the user to track that device, whether it's in a public or private domain. And so we're well positioned. And it's a trend that we're well positioned to take advantage of.
Your next question comes from the line of Mike Walkley from Canaccord Genuity.
Great. And my best wishes to you also, Kent, in the next step of your journey.
Thank you.
Question, just for me back to the 15% higher revenue. Just -- we know it's a tight supply across the whole industry. But of that, call it, 15 million you're not going to be able to ship this quarter, do you think most of that is just pushed out to future quarters? Or do you think those are potential lost sales as customers maybe find alternate supply?
Good question, Mike, and good to speak with you. So I think that we expect most of that to roll forward. There's very few instance where it's perishable demand. But we're working very hard for our customers. It's never good when you can't supply to the time lines that they need. So we're just active with a wide range of suppliers to work and have had great success with them, prioritizing some of our especially public safety market products to be able to get us components for that. So we're expecting that to roll forward, is the short answer to your question, but working hard at it every day.
Great. That's helpful. And then, Sam, a follow-up question for you. One, with the tight supply, what are the impact, maybe, to shorter-term gross margins? Are you going to have to pay more for components in this tight environment on a relative basis? Or can you pass those on to customers? And then second, I think you said you had good line of sight into pro forma operating expenses for the March quarter. Can you help us just think about a run rate for modeling, given it's the first full quarter without any automotive running through it.
Yes, good questions. So first one, there'll be a margin impact. You can think about it as around 1%. We're having to go out and buy parts and raw materials in the gray market, open market, paying higher prices. But as Kent said, we are very focused on servicing our customers' demand. They -- the products they use are used in critical applications. And so we're doing what we can to get those parts and get those products to our customers. But there'll be a small impact to our gross margin in the short term. And to your first question to Kent, most of that will roll over. But since we expect the tight supply environment to continue in 2021, there'll be new ones that come up in the next quarter and so forth. So while there'll be recovery in Q2, there'll be new constraints as we sort of catch-up on that backlog, if that makes sense. In terms of OpEx, I don't want to give any direct guidance there, but I believe in the prepared remarks, I said that it would be down again from the 50.1% level and $2 million, $3 million in that area would make sense.
Okay, great. That's helpful. And last question for me, and I'll pass it on. Thanks for the historical data on the new divisions. As we think about IoT solutions longer term, is this gross margin level a good place to be thinking about? Or as LTARR grows and you get more and more recurring revenue, where could maybe gross margins trend in that business?
Yes, Mike, thanks for that question. So I'll just -- let me recap a little bit. So I think that enterprise is -- gateway business, it's higher gross margin hardware and then high gross margin recurring software in that part of the business. In our IoT solutions modules and the global competitive dynamics of it make it a lower gross margin product line, but then we're attaching the higher gross margin recurring revenues. So as that mix continues to grow as our recurring revenue to hardware revenue ratio continues to move in the direction of recurring revenue, that will drag along, increase our overall gross margins in that business. And the second thing that we've talked about previously is as we continue to scale our connectivity business, we expect to see the gross margins in that business improve. So we'll have improvement in mix and then improvement on the hardware side. On the module side, with the strong global move towards LPWA and lower ASPs, that will continue to have that product area as lower revenue and continue to be relatively low gross margins. But that's good for the overall market, that elasticity of demand as those lower cost units look for -- afford more connection points for IoT data. And then out of that, we're in a good position to enjoy good profitability on providing the full device cloud solution for our customers.
Your next question comes from the line of Derek Soderberg from Colliers Securities.
I want to start with LTARR. I guess I'm wondering if there's any impact there from the supply issues. I think you said this could be sort of an issue throughout the year, but some of these will sort of roll forward. So would these supply issues impact the LTARR deals maybe signed in the past at all? I guess I'm just curious as to how these supply issues impacted any of your assumptions that you guys make for getting to that cumulative LTARR bookings number this quarter. And then I have a follow-up.
Okay. All right. Well, thanks for the question, Derek, and good to have you on the call. So I think in terms of the supply issues effect, instead of answering for LTARR, I'll say our recurring revenue. So I think that what we saw in this year was that Q2, with COVID and people who are working remote, it impacted our ability to get contracts signed for future business of recurring revenue. So our LTARR wins in Q2 were lower. They rebounded in Q3, and then we had a very strong Q4, as we just highlighted here. The next step with those design wins is to get those into production. And the COVID environment has been some slowing of getting projects into production. I think that, globally, we're all getting better at the remote working. But the number of hands on elements of implementations, I mean, there's been some challenges in that regard. But we're making a lot of progress on bringing those on.Where we have customers that we have won, and I gave 3 new examples today, where we're getting both the hardware revenue and the service revenue. If there is supply shortages and delay being able to get our modules or gateways to those customers, it's going to delay, marginally, that recurring revenue side. But I look at it as the -- this building base of customers that are going to be consuming our ongoing connectivity services, along with the hardware, that will continue to drive that growth in our recurring revenue part of the business. So if you're a month or a quarter late on the hardware in the trend, it's not going to make a difference.
Got it. And then just quickly on your $170 million cash balance. Now that you have that automotive piece divested, I guess, how comfortable would you guys feel going out and acquiring something? I mean, is the environment good for that? And then just generally, anything on your focus on use of cash this year would be great.
Sure. Yes, good question. So when we announced the sale of our auto business, and I've said, and sort of we're still in the same position, is that we're just happy to have a strong balance sheet at this point. Selling automotive both strengthened our balance sheet, but allowed us to really focus on these 2 segments that we're now reporting again. And so that's been a big part of the driver for that.The opportunities that are afforded to us with the strong balance sheet, it enables us to be opportunistic. We don't feel we have any big missing parts that we need to go on from an M&A perspective to acquire. But we'll stay tight to what's going on in the marketplace. But no present plans to deploy that capital. We'll just -- we'll keep our balance sheet strength at this time.
[Operator Instructions] Your next question comes from the line of Paul Treiber from RBC Capital Markets.
I just want to focus on the -- the growth in the services business, obviously, is quite strong this quarter. I imagine a bulk of that growth is IoT connectivity. Is that the case? And could you speak about the relative growth rates of IoT connectivity versus maybe enterprise connectivity? And I guess there's also managed IoT services or the, I guess, the enterprise -- sorry, the industrial applications.
Yes. Thanks, Paul. Thanks for the question.So our -- we saw a growth in services across both of our new segments here. We saw good growth in connectivity, continued growth in number of connected devices. And so that was driving our services forward. And then as we can have a -- driving more gateways into the market and driving the software connect to those devices, driving the enterprise side. So I said, the majority of our connectivity is in IoT solutions, and that's really where a lot of our LTARR and connected device wins occur. And as we continue to progress and drive sales of our gateways, which is a very strong progress for us, we'll continue to be able to attach more of our solutions. So both are growing. And that's a forward focus for us.
How do you -- I appreciate you're not giving any outlook like the 2021 outlook. The 25% growth in services, should we expect that growth to be sustained, accelerate? You reiterated the outlook, the long-term outlook on services. But how do we think about the snowballing of LTARR and how that would translate into revenue growth?
Yes. I mean, generally, as we've talked about our models, it is something that will continue to accelerate. And it's accumulation model of as customers that if we won -- that we have won, and as they deploy into more of their devices, we get the recurring revenue. And so that continues to be additive. When we talk about new design wins, as those come into production and they start selling more devices, those continue to add on.So I reiterated that we're on track for hitting our $200 million recurring revenue run rate by the middle of 2022, and $400 million by the middle of 2024. So you can see the acceleration there is more of as those customers continue to deploy, and we continue to win new customers with the deployment side. So we will see faster growth on the connectivity side just by -- because of the math of that, whereas the enterprise recurring revenue off of deployed gateways is more of a linear attached to the gateway with our device-to-cloud module plus attach. As those continue to get sold into the marketplace, we get an additive effect of the connectivity revenue.
Then just one last one for me. How do we think about the mobile computing segment here? I mean you called out, I guess, the design win losses in the past. Are you actively competing for design wins in that segment? Is this a segment that you want to pursue going forward? Or is it something that you just see as not strategic?
Yes. Good question, Paul. So previously, there was some large volume deals. We've called them before with Lenovo and Dell. And those are, as Sam said, not -- won't be a reporting element going forward because we're not comparing to other years' comps with those in the numbers and that's not a segment that we are focused on moving forward with the large-scale PC OEM business. It's quite a rapid RFP cycle and with wins and losses, and I don't think a high degree of differentiation in it. We have some smaller PC customers that have been long time customers that we continue to support. But where we continue to excel at is in the overall connectivity into other high-speed enterprise, router-type application companies. So we've done very well historically there. The company had some areas where they didn't have all of the design slots because of some product elements. As we brought 5G in, we really won significant design slots -- won back slots that we -- the company had forgone in previous cycles. And so we'll continue to be highly engaged. What we do in our modules for Embedded Broadband is the same work -- same R&D work we're doing in modules for our other businesses, so it's very synergistic. Most of those enterprise Embedded Broadband type of applications, less likely to be able to drive connectivity because the nature -- it's sold by a provider like, say, Cisco and then Cisco sells on to an enterprise, the enterprise makes their own connectivity decisions. So that's why we're less able to bundle our attach into those sort of distribution arrangements. But we're very glad to support our customers in that space. And as I said, we've done very well with 5G design wins in that area, and we'll continue to work and focus on it.
Your next question comes from the line of Todd Coupland from CIBC.
I had a couple of questions, and I'll just run through them here. If we think about the cash requirement in Q1, $20 million, more or less, is what you called out. How much of that would be roughly onetime in nature?
Sam, do you want to talk about that?
Yes, good question. So roughly about half of that would be onetime in nature. Going forward, as we work our way through the supply constraint issues, we've invested in increasing our capacity in the manufacturing sites. However, we still may need to add some buffer stock as we sort of get later in the year and as parts become available. But the restructuring costs and the adjustments related to the auto sale are for sure behind us. At least the vast majority of that are behind us. So happy to report that.
Okay. And just so I'm clear on your statement. Did you say the $50 million OpEx number would go down $3 million or $4 million in Q1, or over the course of 2021?
I said $2 million to $3 million -- the $50.1 million would go down $2 million to $3 million heading into Q1. But the only offset on that one is a little bit of engineering rework that we're having to do related to, again, the supply chain tightness that's causing us to rework new parts into products and solve problems on the go. That's leading to some additional cost. But again, we do expect it to come down, like I mentioned.
Okay. And is then -- is that more or less then absorbed, the restructuring, and then it will be the regular rhythm of the business for OpEx after Q1?
After Q1, we should still see some smaller decreases. There's still a little bit of restructuring work happening in the quarter.But the vast majority is done as we work towards that run rate. But going forward, we're going to be very diligent with our OpEx and ensure we're investing those dollars in the right areas. So I hope that answers your question.
Yes, it does. And then on the recurring revenue piece, $32.9 million, up 25%, I think, is what you called out. What is the 12-month trailing number for that? I think you said it, I must have missed it. I was looking for it in the deck, and I didn't see it.
Sam, do you have that to hand?
Sorry, can you repeat that question? The trailing 12 months?
I was just curious what the 2020 recurring revenue number was?
For the whole year?
Yes, for the whole year.
It's about $118 million, Todd, but I don't have it at my fingertips.
Yes. It's $116 million. So the $118 million number -- sorry for the small delay there. The $118 million number includes about $2 million related to the auto business. So from continuing ops, it's $116 million.
$116 million. So when you guys make the statement you're tracking nicely and what that growth rate is, it would suggest that, the $116 million compares to the $200 million and the $400 million that is -- that's the stated goals, right?
Well, the stated goals are run rate basis. So I wouldn't say necessarily that the $116 million relates directly to that. But yes, that's the trailing 12 months.
Yes, right. So the way -- okay, I accept that. So the way to think about it is more the run rate of the fourth quarter and then how that progresses towards those 2 goals.
Correct.
Yes, yes. And to the earlier question, 25%, plus or minus, depending on close rates and because of COVID and sort of getting through all of it. Is there any other dynamics that are sort of noteworthy here beyond COVID? I mean, you cited a few examples at the beginning of the call, so I guess that's the point. But the takeaway is like if we were -- if you were to think about this versus your expectation, if you can strip away COVID, hard to do, I suppose, but how is it progressing versus your expectations? If you could give some qualitative commentary. Let's say, around that $32.6 million, 25% increase in the fourth quarter.
Yes. I mean I think at a high level, the strategy is playing out as we were expecting and focused on doing. We started talking about LTARR in 2019 and reported $93 million of LTARR, and then now this year, $140 million of LTARR. And those are the design wins that we've been driving into give a more complete solution to our customers. Many of the new customers coming in the industrial IoT side, shipping their products to multiple countries. We simplify the whole time to market and deliver that connectivity aspect and simplify the solution for them. So faster time to market and good return. So that part of our strategy has been playing out. There's been impacts of COVID on how quickly some of those projects get approved or implemented, but the general trend is there. And I think if anything, COVID actually helped the general trend. The industrial companies that we're working with are looking to digitize their assets. They want to be able to get preventative maintenance and other benefits from that. One of the large customers, another industrial IoT company, not the one mentioned here, was sharing with us that they see a 25% increase in follow-on sales and a 20% reduction in cost to serve as they get their machines hooked up via IoT so that they're getting all the sensor data from the devices they deploy. So the business case is strong for industrial companies, and that's going to be a big macro trend we're going to see over the years to come. And I think that all industrial companies will have to have an IoT strategy to be able to compete.So we're very well positioned. We're highly differentiated to serve that need as that industrial IoT market grows. And I think with the impacts of COVID and people wanting to have things automated and not required to have as much of a human touch, that's going to accelerate things as we move forward. So we're expecting this market to be significant. It's playing out that way. And COVID is just increasing the aptitude for industrial companies to want to connect their assets.
Yes. Okay. No, that's helpful. I don't know if you're going to provide this, but is there any color you can comment on qualitatively around retention?Gross retention, churn, net retention, how that's -- sort of the expansion into the base once you actually land a project.
Yes. Once we deploy a project, we are generally there for the life of the asset. And so the churn is very low. Once the customer is getting the IoT from that device, the only churn is if they no longer want that IoT data. We're not seeing that. Or that asset goes end-of-life, and then we're well positioned for the design win in the next-generation assets, and they'll be shipping out there to replace it. So it is -- once we are deployed with customers and providing that device-to-cloud, so we have the edge connectivity, we're managing it through our device management, our SIM management interfaces to the customer, we have our global mock that's managing and making sure that those devices are always on the air and reporting data, it's very sticky.
Okay. Last question for me. We're obviously aware of the CEO -- planned CEO transition. Is there any sort of commentary or comments that can be made relative to existing strategy? And what sort of adjustments might we anticipate with the CEO transition? Any comments that can be made on that would be helpful. I appreciate it.
Yes, sure. Glad to talk to that. I mean, our Board has really lined up with the overall strategy. And so we're looking for the company to continue on this path and build further success as we move forward. The ability to offer a complete device-to-cloud solution has proven very important for winning business in the marketplace. We are well differentiated, and we look to scale both sides of our business, IoT solutions and Enterprise Solutions. So it's really about continued focus on that execution. It's been a pretty big transformation over the last 2 years from our products through to rebuilding what we do in our go-to-market side. And so that heavy lifting is -- has been mostly complete and the focus on continued execution into this large and growing market.
There are no further questions. I'll turn the call back to management for closing remarks.
Well, thank you very much. Great set of questions today. Glad to share our annual results with you, and look forward to continued engagement. We wish everyone best of health in these challenging times. I think there is some good light at the end of the tunnel with what's happening, with vaccinations and declining rates. We look forward to more things getting back to normal and especially having a product supply getting back to normal. But we'll continue to work that hard for our customers and for our results.So thank you very much, everybody. Have a good rest of your day. Cheers.
That concludes today's conference call. You may now disconnect.