Sierra Wireless' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 6.13 | About: Sierra Wireless, (SWIR)

Sierra Wireless, Inc. (NASDAQ:SWIR)

Q4 2012 Earnings Call

February 06, 2013, 05:30 pm ET

Executives

Jason Cohenour - CEO

Dave McLennan - CFO

Analysts

Matt Ramsay - Canaccord Genuity

John Bright - Avondale Partners

Paul Treiber - RBC Capital Markets

Richard Tse - Cormark Securities

Todd Coupland - CIBC

Steven Li - Raymond James

Operator

Good afternoon and welcome to the Sierra Wireless Incorporated 2012 Fourth Quarter and Year-End Results Conference Call and Webcast. At this time, all lines are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. I would now like to remind everyone that this call is being recorded today, Wednesday, February 06, 2013 at 05:30 Eastern Time.

I would now like to turn the meeting over to Mr. Jason Cohenour, Sierra Wireless’ Chief Executive Officer and Mr. Dave McLennan, Sierra Wireless Chief Financial Officer. Please go ahead, Mr. McLennan.

Dave McLennan

Thank you and good afternoon everyone. Thank you for joining today's conference call and webcast. With me today on the call is Jason Cohenour, the company's President and CEO. 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: Jason will provide a general business overview. I will then cover the fourth quarter 2012 financial performance in detail as well as guidance for the first quarter of 2013, and then Jason will return for some brief summary comments and Q&A.

Before we get started, I will reference the company's Safe Harbor statement. A summary of the Safe Harbor Statement can be found on page two of the webcast and is now being displayed. Today's presentation contains certain statements and information that are not based on historical facts and constitute forward-looking statements. These statements include our financial guidance for the first quarter of 2013 and commentary regarding the outlook for our continuing business.

Our forward-looking statements are based on a number of material assumptions, including those listed on page two of the webcast presentation, which could prove to be significantly incorrect and our forward-looking statements are subject to substantial known and unknown material risks and uncertainties.

I’ll draw your attention to a longer discussion of our risk factors in our Annual Information Form and Management's Discussion and Analysis which could be found on SEDAR and EDGAR as well as in our other regulatory filings. This presentation webcast should also be viewed in conjunction with our press release and with the supplementary information on our website.

With that, I will turn it over to Jason.

Jason Cohenour

Thank you Dave and good afternoon everyone. As you are aware, last week we announced another major step in the continuing transformation of Sierra Wireless. The completion of a definitive agreement to sell our AirCard assets and operations to Netgear. This deal represents a major milestone for our company and brings us another step closer to becoming the pure-play leader in M2M and connected device solutions.

We anticipate net proceeds from the sale of approximately $100 million which we will use primarily to accelerate growth and create shareholder value through additional M2M acquisitions. The execution of this agreement also impacts the manner in which we are reporting our results. In accordance with US GAAP, we recorded the assets and liabilities associated with this sale as, held for sale and the results of the AirCard business as discontinued operations.

Revenue from our AirCard discontinued operations was $54 million in the fourth quarter of 2012 and $247 million for the full-year 2012. More detail on the financial performance of our discontinued operations can be found in today’s press release. The primary focus of today’s call is our continuing operations, which consists of our AirPrime embedded modules for PC OEMs and machine-to-machine, our AirLink M2M gateways and routers and our AirVantage M2M cloud.

As a reminder, the new the Sierra Wireless or our continuing operations will be the pure-play leader in M2M and connected device solutions with over 34% market share. Our base of customers and partners is extensive and enviable with many of the world’s leading OEMs spread across many industry segments and even more applications. We are a leading innovator with a broad leading edge product portfolio and unique device to cloud offerings.

Our continuing business have significant scale, shipping on a pace of over 11 million units per year and generating more than $400 million in annualize revenue. We have global capability with sales and support around the world and R&D on three continents. In short, we have all the elements required to drive profitable organic growth and industry leadership. Following the transaction, we expect to have over $160 million in cash and no debt, providing us with the resources we need to accelerate our growth and value creation through acquisitions.

Another key reason why we believe we will continue to expand our position and drive profitable growth is the breadth and depth of our M2M product offering. We have the industry’s broadest embedded module product portfolio, ranging from 2G to leading edge 4G covering multiple form factors and delivering a range of embedded intelligence options. This enables us to meet the needs of nearly any global OEM operating in any region, on any network around the world.

We have a range of intelligent gateways and routers that deliver a highly configurable plug-and-play solution and we have our AirVantage cloud that works with our hardware platforms to enable the rapid development and deployment of M2M solutions. By providing device-to-cloud solutions we make it easier, faster and cheaper for our customers to build, deploy and manage their M2M solutions. We believe that this places us in a unique competitive position and enables Sierra Wireless to not only expand our share, but to capture more of the value chain, expand margins and to build competitive barriers.

Our Go-forward business has delivered excellent growth and improving profitability over the past four years through a combination of organic and inorganic growth, improved gross margins and operating expense management. Since 2008, our Go-forward business has growing at a rate of 27% per year to nearly $400 million in 2012. Year-over-year revenue growth in 2012 was a very solid 19% compared to 2011. Revenue in Q4 of 2012 was exceptionally strong at a $109.4 million representing growth of 33% compared to Q4 of 2011. This was assisted by a strong contribution from Sagemcom and its first full quarter as part of Sierra Wireless.

As our revenue has grown, our profitability metrics have shown steady improvement moving from a significant non-GAAP loss position in 2011 to modest non-GAAP profitability in 2012. The second half of 2012 was solidly profitable anchored by an exceptional Q4, when strong revenue, gross margin and cost management drove a non-GAAP operating margin of 3.4%. I believe that our recent operational performance highlights our ability to drive significant organic and inorganic growth and improving profitability metrics as we scale the business.

Q4 was also eventful from an operational standpoint as we continue to secure new design wins in key segments and launch new products that will help drive our business forward. As you can imagine new design wins are key to our business; they bring us new customers, new opportunities, new segments and provide visibility for future revenue growth.

During Q4, we continued to have success in securing new design wins in a number of our key segments. We continue to see expanding activity in the networking space as router and gateway OEMs positioned themselves for fixed line alternative opportunities around the world. We believe that 4G is the key enabler of this market opportunity as wireless internet speeds are now matching and in many markets surpassing legacy wireline speeds. We believe the wireless replacement opportunity is poised for secular growth and that we have a dominant design win share in this space.

We also continue to experience the tremendous level of activity with automotive and transportation OEMs and successfully secured design wins from new programs during the quarter. We believe that the connected vehicle represents another secular growth opportunity and that overtime nearly every vehicle sold will have embedded connectivity.

We continue to experienced design win share gains with PC and tablet OEMs as well. We have seen significant revenue growth with PC OEMs in the past year and believe that the strength of our 4G and Win 8 position, low market penetration and the exit of key competitors will enable us to drive continued growth in 2013.

With respect to new products, we have now released the next generation AirVantage M2M cloud and announced a new partnership with Amazon web services. The AirVantage M2M cloud provides a secure scalable simple platform that enables our customers to rapidly build and deploy their M2M applications.

Combined with Amazon web services, the AirVantage cloud enables customers large and small to deploy an application for lower implementation costs at nearly zero capital investment. This launch of the next generation AirVantage cloud is an important step in Sierra Wireless becoming the M2M platform of choice for OEMs, integrators and operators around the world and to us capturing more value from every connected device.

We also introduced our second generation of 4G embedded modules both during our 4G leadership position. We have design wins for these next generation products and expect to begin commercial shipments in the first half of this year to customers in the PC OEM and networking segments.

With that, I will now turn the presentation back over to Dave who will take us through a more detailed look at fourth quarter results and guidance for the first quarter of 2013.

Dave McLennan

Thank you, Jason. I would like to note that we report our financial results on a US GAAP basis. However, we also present non-GAAP results in order to provide a better understanding of our operating performance. As you have noted from our press release, the pending sale of the AirCard business triggers a change in how we present our financial statements.

As a result, we are reporting the AirCard business as a discontinued operation. To assist you with this new basis of presentation and specifically provide historical comparisons for our continuing operations, we have posted in the Investor Section of our website a supplemental financial information packaging for these continuing operations which include GAAP and non-GAAP income statements for both 2011 and 2012 by quarter as well as a reconciliation of GAAP to non-GAAP results.

So I encourage you to go, have a look at that and see the basis of presentation historically. But before we move to this new reporting format, let's first look at our consolidated business which includes the discontinued AirCard operations and compare this to the consolidated guidance we provided for Q4.

With a very strong fourth quarter achieving total revenue of nearly $164 million which is toward the higher end of our guidance and within this our machine-to-machine business slightly exceeded our expectations for the quarter.

On a GAAP basis, we had total earnings from operations of $3.2 million. On a non-GAAP basis, our earnings from operations were well ahead of guidance coming in at $10.2 million compared to a guidance range of $7.5 million to $9 million.

GAAP net earnings included significant one-time benefit from the record addition of a tax asset as a result of the pending sale of our AirCard business. This resulted in approximately $13.4 million or $0.44 per share tax recovery and drove GAAP net earnings to $19.6 million or $0.64 a share.

On a non-GAAP basis, we achieved very strong net Q4 earnings of $10.3 million or $0.33 a share well ahead of our guidance. This stronger than expected profitability in the quarter allowed us to release an additional tax asset valuation allowance in the normal course which negated taxes in the quarter. You should also note that our fourth quarter non-GAAP earnings exclude the impact of the above noted transaction tax benefit.

As a reminder, the reconciliation between our GAAP and non-GAAP results is provided in the press release as well as in the Investor Relations section of our website. Non-GAAP results exclude the impact of stock-based compensation expense, acquisition disposition costs, acquisition amortization impairment, acquisition cost, integration cost, restructuring cost, FX gains or losses on foreign currency contracts as well as translation of balance sheet accounts and certain tax adjustments.

As I mentioned a moment ago, supplemental material is on our website which will further illustrate the impact of discontinued operations carved out on our historical results.

I will now focus on the results from our continuing business and in particular on non-GAAP results. For the full-year, our continuing business delivered $397 million of revenue and is essentially breakeven, totaling $900,000 of profit at the operating level and a $400,000 loss at the net level.

Q4 was exceptionally strong with revenue of $109 million and gross margins of 33.2%, the highest of the four quarters. Q4 includes the revenue contribution of $15.5 million from the M2M operations we acquired from Sagemcom. Q4 is referred four quarters for these products and our results.

Q4 non-GAAP OpEx was $32.6 million, including expenses from the Sagemcom M2M business. During the quarter, we benefited from one-time project funding from a partner, which served to offset certain R&D expenses. Without this funding, OpEx would have been approximately $34 million for the quarter.

Solid revenue and improved gross margins resulted in non-GAAP Q4 operating earnings of $3.7 million or an operating margin of 3.4% and net earnings of $4.5 million or $0.15 per share. This excludes the impact from the transaction related tax benefit which I spoke about earlier.

We continue to make good progress in improving our profitability. We experienced year-over-year revenue growth of 33% in Q4 both our M2M embedded modules business and our intelligent gateways business delivered strong year-over-year revenue growth.

Sales of embedded modules to PC OEMs were also up substantially year-over-year as we introduced new products and executed on new design wins in this area.

Non-GAAP gross margin as a percentage of revenue was 33.2% in the fourth quarter up considerably from 30.7% a year ago. Favorable product mix and product cost reductions drove this improvement.

The combination of revenue growth and improved gross margin partially offset by higher operating expenses as we integrated the M2M business acquired from Sagemcom drove a significant improvement in profitability year-over-year. Non-GAAP earnings from operations improved to $3.7 million in Q4 of ‘12 up from a loss of $4.4 million a year earlier.

Turning to the balance sheet, our financial capacity remains strong. During Q4, cash generated from operations was $10.5 million less CapEx and other expenditures resulted in a net $4.1 million increase in our cash balance to end the quarter at $63.6 million. Following closing of the AirCard transaction, we expect to have in excess of a $160 million of cash.

In terms of deploying this capital, we are actively evaluating additional M2M acquisitions to accelerate growth and create value. We have a well established track record of acquiring good companies, integrating them well and creating value as a result. We have also received approval from the TSX to implement a normal course issuer bid to buyback up to 5% of our outstanding shares.

Moving on to guidance for the first quarter, first quarter 2013 guidance on our continuing operations. On a sequential basis, we are expecting revenue to be down compared to the exceptionally strong result in the fourth quarter of 2012. This reflects first quarter seasonality and product transitions with some of our customers.

In the first quarter, we expect our gross margin percentage to be similar or slightly lower than that of Q4, and operating expenses to increase as a result of higher new product certification cost combined with the negative impact of the [strength] in Europe.

We expect to incur a net loss of between $1.5 million to $2.5 million in Q1 or a loss of $0.05 to $0.08 per share. Looking forward to the second quarter of 2013, we expect to return to solid sequential and year-over-year revenue growth as well as modest profitability.

With that, I will turn it back to Jason.

Jason Cohenour

Thank you, Dave. So in summary, Q4 was an excellent quarter for both the combined and continuing businesses. We delivered strong year-over-year revenue growth, strong gross margin and earnings that exceeded our expectations. As we look forward to Q1, we expect to experience some seasonal softness in our continuing operations results followed by a quick return to solid sequential and year-over-year revenue growth and modest profitability in Q2.

Also during Q1, we expect to complete a major step in our transformation into the peer play leader in M2M and connected device solutions. We are on track to close the sale of our AirCard assets and operations to NETGEAR in March, unlocking value in our AirCard business providing more focused and financial capacity to drive the new [CRL] wireless forward.

The new CRL wireless will be an established leader with sharpen focus on capturing the M2M growth opportunity. I believe we are extraordinarily well positioned to accomplish this mission. We are the clear market leader with an extensive blue chip customer base, broad product portfolio, global capability and solutions across the value chain. Organically, our goal is to continue to drive revenue growth and expanding profitability, as we leverage our leadership position, capture share and expand into new segments and geographies such as Brazil. Post [calls] we expect to have approximately $160 million in cash and no debt. We plan to put that cash to work in acquiring great M2M companies that help us expand our position in the value chain, strengthen margins and drive growth. I believe our track record of doing this is strong.

Since 2008, we've grown our continuing business organically and through acquisition from 158 million to nearly 400 million, while improving our margin profile and defensibility. Our aim is to do more of this and in so doing deliver a great return to our shareholders.

Andrea that concludes our prepared remarks and we can now open the line for questions.

Question-and-Answer Session

Operator

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

Matt Ramsay - Canaccord Genuity

Congratulations guys again on the sale of the consumer business net year and a solid Q4 results. I just wanted to jump in a few questions from us. I guess the first one maybe some more color on the softness in the Q1 guide for the retained business. You mentioned a couple of things I guess in the prepared remarks, one was in particular a product transition with some of the customers, and you could shed a little light on that and maybe the mix of the softness from M2M business or from PC OEM business.

Jason Cohenour

Q1 guide you know we are guiding down sequentially as you saw that is coming off of an exceptional Q4 so the comparison period was quite strong. But a little lower than desired nonetheless. The Q1 guide does represent about 9% year-over-year growth, but still not quite where we want it to be. So what's driving that and we mentioned a couple of things, seasonality and if you look back historically you will say well we don't actually see the seasonality in your numbers and that frankly is because often underlying seasonal demand trends are covered up by other things like new product launches or exceptional business activity. So I think in this case we are seeing through first quarter seasonality impact both the send user demand as well as the revenue projection, and then a few handful of product transitions Matt and that's a fairly broad based, but I would point to primarily a little bit in PC OEM as we are transitioning some customers to new LTE platforms and also our solutions and services business where we've just recently launched some new products and customers are taking a little while to transition to those new products.

Matt Ramsay - Canaccord Genuity

Following up one more question on the PC OEM business, it was obviously very strong this year that being 2012 relative to where it was in prior years. And now with Ericsson and Novatel more recently announcing they are exiting that business, could you maybe talk about your opportunities for share gains and is there a potential to get back toward that $20 million a quarter run rate that was kind of pre Qualcomm’s entry into the market a few years ago.

Jason Cohenour

Yeah, before getting too far ahead of ourselves, you are right. I mean it's been a nice growth business for us. We grew at 55% year-over-year full-year, year-over-year and our expectations in ‘13 are for continued growth, probably not a 55% pace but continued growth. And to your point, we believe part of that growth will be coming through share gains. In fact I would venture to say most of that growth is coming through share gains and we also expect to see, although we don’t have perfect visibility on this yet but we expect to see a bit of mix shift as well favoring LTE which hopefully will mean good things from an ASP standpoint.

And then finally, I will point to penetration. The market still is, I would say, subscale from a penetration standpoint and that may lead you to be disappointed. But we're actually not, because we think it gives a lot of head room to grow through to increase market penetration as well. So, we do think it's going to grow, not prepared to say it's going to go 20 million a quarter at this point in time but our expectations are for growth, principally driven through share gains.

Matt Ramsay - Canaccord Genuity

I guess one last question for Dave and then I will jump back in the queue. Around OpEx, you had given the 32.5 for Q4 for the retained business and it sounds like it's going to be a bit higher in Q1. Could you talk about, a little bit about what you think the base line run rate for OpEx could be going forward and should we expect it to grow or be relatively flat and then maybe the contributions of those certification costs you brought up in the prepared remarks for Q1 OpEx?

Dave McLennan

(Inaudible) it's Dave. So just starting with the Q4 run rate the 32.5, you incorporated some, I will call them unusual contribution from our partner that offset some R&D (inaudible) project. So you will think of the Q4 run rate closer to 34 million. And then from time to time we have some lovely cost associated with new introductions and certifications around those new products and we are going to see that this quarter Q1. So you will expect to Q1 to be able to a bit above the 34 run rate we saw in Q4 because of the certification cost that we expect to see and also things like the euro. The euro has come up here and that increases our cost base and with our team in Europe. So a combination of those things puts us around 35 plus or minus and that’s what will be for the near term.

Operator

Your next question comes from the line of John Bright with Avondale Partners. Your line is open.

John Bright - Avondale Partners

Jason, Dave I kind of want to walk through this step by step to understand it a bit better. The start on the product mix from AirPrime, AirLink and AirVantage kind of give me a sense of the gross margin profile of those today and relative size of those today?

Dave McLennan

John it’s Dave our M2M business is running the gross margins in the low 30s, that’s our M2M embedded business. So somewhere between 30 and 35 would be a representative number there for gross margin at that spot. PC OEM would be below that. Our AirLink intelligent gateways router business would be substantially above that and in fact those products on average vendor to be pretty close to 50% gross margins.

John Bright - Avondale Partners

And the size of the Spectra pieces in the quarter?

Dave McLennan

If you go to the last page in the press release there is a table there breaking out the revenue by product category.

John Bright - Avondale Partners

Perfect, I didn't see that, I will find that. Next question how much does your financial visibility improve as your pure play in M2M company, you mentioned design wins during the call, kind of give us an idea what’s the time to market on those design wins and how much more visibility do you have as a pure play financial visibility?

Jason Cohenour

Yeah, this is Jason, John. You know visibility I think significantly better, yet there is a surprise, there tends to be a smaller surprise in then in either direction up or down then with the AirCard business. The AirCard business has by the way great business, profitable business but it can't be volatile because of the high amount of customer concentration and the vagaries of the consumer market. With respect to the machine and machine business we have no 10% customers so it’s a highly fragmented customer based and think of it, as we grow we are layering new customers and new design wins on top of a fairly stable base. So we got pretty good visibility and good I would say levers and dials to drive the business forward.

John Bright - Avondale Partners

On the time to market design wins here.

Jason Cohenour

Yes, so time to market on design wins, that is pretty broad range there; I’ll be very candid, you know say a short period of time would be six months from design win to actual commercial shipments; that would be I would say on the extraordinary short part of the spectrum. And to the other end, it could be two years, you know, from a design win to commercial volume shipments and we’ve got customers who go across that, the different customers who go across that entire spectrum.

John Bright - Avondale Partners

Last question surrounds the acquisition opportunities. First of all, would you say that you believe the currently then, organic profile, growth profile for the marketers call it 10% to 15%, that's kind of statement I want to see if you agree with that first? And then secondly, how far along the path of M&A have you already traveled, kind of give us a sense of that, maybe discuss the fragmented market which verticals that might offer the most attractive low hanging fruit?

Jason Cohenour

Yeah, I think your growth expectation is fair in the short-term, that's the way we are thinking about the short-term growth opportunity. With respect to our M&A funnel, I would characterize it as active and we are having, I would say a number of conversations with management teams and working with outside advisors as well, to keep the funnel going and I would say there is probably one or two quite actionable targets in the funnel as well. But as you know M&A takes time, so that doesn't mean the deal gets announced next week, it could still be several months, but my expectation is we will be busy on the deal front in 2013.

With respect to themes of the kinds of company in the M&A funnel, we've got a [parade] of kinds of companies we are looking at and favored companies are about expanding our position in the value chain, plainly put; and there is kind of two themes there, one is higher margin terminal devices of various kinds made much like our AirLink gateways and routers and also solutions and services. So perhaps building scale on subscribers that bring recurring software or other services revenue.

Operator

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

Paul Treiber - RBC Capital Markets

Looking at the supplemental information, the gross margins in your M2M business would probably average about 31% over the last couple of years versus 33% this quarter. How sustainable are gross margins at the 33% level and then should we expect further margin expansion as you grow the business or is this quarter a little bit of an anomaly?

Dave McLennan

Paul, its Dave. One thing to keep in consideration as you look at particularly in 2012 our gross margin profile, in the first part of the year we did not own Sagemcom, so we saw a benefit of Sagemcom in the fourth quarter for instance say included in that 33.1% just because those products are running at above the corporate average and blending up gross margins. So that's one reason among many as to the increasing trajectory; we've also done well on reducing product costs, we've got scale on the interim side of our business as well. So all of those things and then other elements of product mix including you know fairly successful Q4 with our intel and gateways business. So all those things combine to drive the Q4 margin to where it was. So how sustainable is that? When we think about a long-term model, Paul, gross margin is, you know, somewhere there to 35% is really where we are thinking is the long-term model gross margin.

Paul Treiber - RBC Capital Markets

Thanks. In terms of the operating leverage on the M2M business, it seems like there is probably less operating leverage in the AirCard business, because it's much more fragmented customer base, but it's probably not linear with revenue. Can you walk through just what are your thoughts on operating leverage here as you grow the business organically and as you layer on acquisitions?

Dave McLennan

Yeah, no questions. The AirCard business is a more highly levered model. Although, you know, it can be very lumpy because you are on that treadmill of fairly rapid technology refreshes. Yeah, so there is less leverage in the embedded side of the business, but I would say with our, current investment and our capability, it feels like we're fully invested in terms of having worldwide capability to continue to develop and support, to continue to develop new products and support existing products. So we don’t have to increase OpEx significantly as revenue increases here overtime. I think we’re coming off of a pretty full base capability right now that we can leverage without adding too much to those cost. You know, there will be some lumpiness with respect to certain costs as we introduce new products, but that comes and goes with those introductions.

Paul Treiber - RBC Capital Markets

Okay. And related to that, I think you've always mentioned in the past that you've been investing in your M2M business whereas the AirCard business is more of a cash cow. Now, as a M2M pure-play, how you balance investments versus delivering a return on that investment and if you can try to put a timeframe around that if you could?

Dave McLennan

Yeah most definitely the past three years have been heavy investment period for new M2M products and we have invested heavily on the other side too with 4G products, but with respect to M2M, we have heavily invested in new technologies, we have heavily invested in the platform and I think what we are seeing at this point where it’s time to monetize those investments and go out and yield so hard those new innovative products and leverage the investment that we have now.

In terms of the timeframe, difficult, difficult question I think what we do see is very good growth prospects in this business and we have got the cost structure that supports a larger business and so if those growth prospects materialize, I think we are in good shape to begin to earn higher level of profitability and return for our shareholders.

Jason Cohenour

Yeah and I would echo what Dave said and I point to some evidence (inaudible) if you look at our non-GAAP earnings from operations or I should say non-GAAP loss from operations in 2012 and in our continuing business it was negative $22 million, right. So with call it roughly the same cost structure we have grown, we have kind of grown into the cost structure I think is the way to is the best way to describe that and as Dave said we believe we are fully invested, so we are not planning to stop any of the investment programs or stop any of the programs that may be in the queue but we are certainly not considering ramping investment.

We believe we got the kind of cost structure that can drive growth and I think you will see improving leverage and margin expansion overtime.

Dave McLennan

And then either part of your question was the acquisition side, so from that perspective, we definitely focused on complimenting that organic growth with M&A as Jason spoke about a moment ago.

And I think we do have a good track record of buying well and integrating well to that link in 2007 we have common 2009, so it's [uncommon] in ‘12 middle of last year and those has all been successful value drivers in our model, so I think we will carefully step to that part of the plan as well.

Operator

Your next question comes from the line of Richard Tse with Cormark Securities. Your line is open.

Richard Tse - Cormark Securities

Yeah, just on that leverage question, so if you would can go into consulting your current marginal market further, were there not be a tremendous amount of operating leverage from the perspective R&D and G&A footprint, you are saying here that you ramped up an R&D, is that not sort of a good path to go down just from the scale perspective or I am missing something here?

Dave McLennan

I mean it depends on the target, Richard right, I mean. Sagemcom, M2M business that was an asset purchased that had a very kind of narrow OpEx scope with respect to product people and R&D, people and no G&A for instance. So whereas, if you buy a fully loaded company with a current cost structure surely there is going to be synergies there.

Richard Tse - Cormark Securities

Yeah, I can probably a name a couple on that have, you probably out $40 million in cost that's like $0.60 or $0.70 in earnings for you guys potentially.

Jason Cohenour

We can probably name those guys too. It’s a fair point, you make a very fair point and those names have to be on the list for consideration, you know, again though I would say if you look at the priorities in the funnel, they are more heavily weighted to value chain expansion. So the kind of products that can drive not just improved operating margin but improved gross margin profile as well in the form of higher value hardware and/or services. But consolidation is definitely an idea that's on the table too.

Richard Tse - Cormark Securities

In regards to the base line OpEx so I think you mentioned $34 million or $35 million, so if you look at the operating number that you had for continuing operations this past quarter, would it be fair to say its based on that increase in costs at $0.40 kind of a reasonable run rate number here for the continuing operations once you kind of have all this divestiture done?

Dave McLennan

Yeah, I'm not going to comment on sort of future EPS in that context Richard.

Richard Tse - Cormark Securities

Yeah, I was kind of like you know thinking okay.

Dave McLennan

Yeah, I think you got the pieces right, I mean you know where we are targeting gross margin. You know, you've got a sense of the OpEx run rate and the growth opportunities.

Operator

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

Todd Coupland - CIBC

Okay. Just wanted to dig into the seasonality a little bit, can you talk a little bit about what types of products are more susceptible to a slowdown in Q1?

Jason Cohenour

Yeah, this is Jason. I would say frankly, its pretty broad based, its not, I don't think there is a product theme there. This is something that Wavecom as an example pre-acquisition has experienced year-over-year in their business. So it’s a fairly well established pattern I would say in terms of underlying end user demand and not specific to any one product.

Todd Coupland - CIBC

Okay. And then the bump that you are expecting in Q2 in terms of snap back in revenue, is that mostly seasonality or are you banking on some new design wins and if you are can you maybe talk about the sectors and how it would flow into the business over the next couple of quarters?

Jason Cohenour

Yeah, I would say that the primary theme there is kind of getting through getting through the Q1 seasonality and a kind of a rebound to normalized levels, that's the primary theme. Having said that, in addition to that I think we do expect a small handful of new programs to begin to ramp a bit including in automotive and automotive networking and PC OEMs.

Todd Coupland - CIBC

And just to so we understand the type of application in a car, what kind of service would you be bringing to that car, is it just emergency call capability or what else can you bring into the car?

Jason Cohenour

It’s a wide range Todd, we see the very basic application is as you said its crash reporting and that is as you may know, mandated in the EU that every car has to be equipped with E911 capability. So you hit a tree with your car and a message is automatically sent to emerging dispatch. That’s kind of a table stick functionality and then from there you work your way across a pretty wide spectrum right up to connected infotainment system that require a 4G connection. So a real time access to the internet, streaming media etcetera and then there is a whole bunch of stuff in between, kind of the meeting potatoes in between just think of applications like OnStar as an example. So in addition to driver safety applications, a bunch of driver convenience and road side assistance applications. That’s kind of the spectrum of that.

Todd Coupland - CIBC

And then just lastly, sort of bounce back to a targeted growth rate of 15% for the business. Is that mostly just the economy getting stronger or is there enough in your pipeline where you can actually step up to that growth rate, at some point in the quarters over the course of 2013 without an economic tailwind?

Jason Cohenour

Yeah, I think, we're thinking about it as 10 to 15, without dramatic improvement in Europe as an example. And in fact in 2012, we put up organic growth of about 13% in the continuing business. Of course, that came across a mix of businesses, not just M2M. So I think we're pretty comfortable thinking about short-term growth in the 10% to 15% range, and if we have, a significant and meaningful macro recovery in key regions like Europe, then perhaps we can get above that.

Todd Coupland - CIBC

Okay, sorry, one last question, my apologies. And if its in the disclosure, just tell me and I will look it up. What are the revenues splits of the run rate business from a geographic point of view?

Dave McLennan

It is not in the supplemental information Todd…

Jason Cohenour

I don’t know that we have that perfectly split out yet I believe we have that for M2M, but we haven’t layered into that data the PC OEM is that right?

Dave McLennan

That’s correct.

Todd Coupland - CIBC

Okay and just I don’t know if you could provide directional color on it. Europe as a rough percentage of the total is this like half the business or third or?

Jason Cohenour

No, Europe as a percentage of revenue of the continuing operations is about 23% in Q4 it was about 23%. So Europe actually popped a bit for us as a result of the Sagemcom contribution. So organically it was continued to kind of be flattish, but we layered on a full quarter of contribution from Sagemcom. So that popped up and represented 23% of continuing operations.

And just a bit of added clarity there Todd that is a revenue number. So while some of our customers build their products in Asia and ship them to Europe, we are shipping modules to that OEM in Asia that for us is Asia-Pac revenue even though the end user may be in Europe. So when we say 23% that means sales, shipments actually made to OEMs and customers in Europe hopefully that’s not confusing for you that straight forward.

Operator

Your next question comes from the line of Peter Misek with Jefferies. Your line is open.

Unidentified Analyst

Hey this is [Jason] on for Peter. Looking at the cost structure and growing as per cost structure now of course to your, where in particular do you see the most leverage or in other words which initiatives are you looking at to return the most, thanks?

Dave McLennan

In terms of the product lines that will drive growth, Jason is that what you are thinking.

Unidentified Analyst

Product lines, geographies, new verticals etcetera?

Jason Cohenour

Yeah, so maybe I will touch that. So it is the cost structure off to decide and focus, because cost structure as we said is, we believe we are fully invested, we got a cost structure that supports our larger business and we got, we believe we can leverage the cost structure we have to scale the business, so where we going to get the scale the revenue growth.

And I would point to it’s broad based. We’ve got, I would say growth expectations across our key product lines and key segments. Our themes that have been driving us forward in the recent past, and we think we will continue and include automotive, networking, energy and PC OEM to name four, but there is probably another four segments that are also important contributors. But if I look at those four, those four segments represented don't write this number down, those four segment are approximately 40% of our overall continuing business revenue mix.

Operator

And our final question in queue comes from the line of Steven Li with Raymond James. Your line is open.

Steven Li - Raymond James

Jason the 10% to 15% growth rate you just gave is that all organic and the incremental couple of quarters from Sagemcom you didn’t have in 2012 is on top of that.

Jason Cohenour

So when I said 10% to 15%, I'm thinking full year 2012 to full year 2013 and so it does include a smaller contribution from Sagemcom in ’12 and a full year contribution in ’13.

Steven Li - Raymond James

And just one other question on your gateway business, it was up about 20%, is that rate sustainable or was there some one-offs in 2012.

Jason Cohenour

We should hope so, we are up to a little bit of a slower start than we would like here in Q1. But I would say in general Steven we are quite bullish on that business notwithstanding some customer transition things here in Q1. So I don't know if we get 19% growth this year out of that business, but certainly we see that business as a growth opportunity and as said earlier it’s got a very nice mixed impact on gross margin and operating margin. So certainly we think we can grow it, I wouldn't put a 19% handle on it right away but we believe we can grow it here in 2013.

Andrea I think that would be final question. So we’ve completed the call. I'll thank everybody for participating and Andrea you can wrap things up and disconnect.

Operator

Ladies and gentlemen thank you for your participation in today's teleconference. You may now disconnect.

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Sierra Wireless (SWIR): Q4 EPS of $0.33 beats by $0.15. Revenue of $109.4M (+11.3% Y/Y) misses by $52.85M. (PR)