Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

David McLennan – CFO

Jason Cohenour - CEO

Analysts

Mike Walkley – Canaccord Genuity

Richard Tse - Cormark Securities

Paul Treiber - RBC Capital Markets

Tim Quillin – Stephens Incorporated

Todd Coupland - CIBC World Markets

John Bright - Avondale Partners

Unidentified Analyst

Sierra Wireless Inc. (SWIR) Q3 2013 Earnings Call November 7, 2013 5:30 PM ET

Operator

Good afternoon ladies and gentlemen, and welcome to the Sierra Wireless Third Quarter 2013 Earnings Results Conference Call and webcast. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time. I would like to remind everyone that this call is being recorded today, Thursday, November 7, 2013 at 5:30 PM Eastern Time.

I would now like to turn the meeting over to your host for today’s call, Mr. Jason Cohenour, Chief Executive Officer, and Mr. Dave McLennan, Chief Financial Officer. Please go ahead, gentlemen.

David McLennan

Thank you Ian, and good afternoon everybody. This is Dave McLennan speaking. Thanks for joining today's conference call and webcast. With me today on the call is Jason Cohenour, our 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. Firstly, Jason will provide a general business overview. I will then provide a more detailed overview of our third quarter 2013 financial result as well as guidance for the fourth quarter. Following that, Jason will provide a brief summary and we’ll end the call with the Q&A session.

Before we get started, I would like to reference the company's Safe Harbor statement. A summary of our 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 constitutes forward-looking statements. These statements include our financial guidance for the fourth 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. Additionally, our forward-looking statements are subject to substantial known and unknown material risks and uncertainties.

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

With that I’ll turn it over Jason to provide highlights.

Jason Cohenour

Thank you, Dave, and good afternoon everyone.

In Q3, we delivered another quarter of record revenue, growing revenue year-over-year by 12% to $112.3 million. Record revenue, solid gross margin of 33.4% and a stable cost structure resulted in strong adjusted EBITDA of $5.9 million representing an 81% increase over last year. Growth and profitability once again outpaced revenue growth by a wide margin demonstrating the leverage in our operating model.

While delivering solid operational results, we also commenced the deployment of our AirCard proceeds in M&A announcing and completing the acquisition of AnyDATA's M2M assets in October. We view this transaction as a modest but important start, and expect to continue to accelerate our growth and strengthen our market leadership position through additional M&A.

Now let’s take a closer look at the results in our two product segments. Our OEM solution segment once again delivered steady growth with revenue of $95.9 million up 90% year-over-year with growth in the Americas particularly strong. Design activity continues to be robust in a number of segments.

During the quarter, we secured new program wins in sales and payment, security, PC OEM, and energy where we scored an important design win with one of the global leaders in Smart Metering.

Activity in automotive continues to be very high, and we’re competing for a number of new programs expected to launch in 2016 and beyond. This level of activity gives us high confidence that the connected car trend will continue, that penetration rates will grow, and that we will be a direct beneficiary.

During the quarter, we also had our first European launch with Dell, who brought a number of new platforms to market using embedded Sierra Wireless technology and featuring a prepaid service offering in collaboration with Telefonica.

In addition to customer programs, innovation continues to be a key contributor to our leadership position. Underscoring the importance of innovation, we recently announced the launch of a powerful new series of embedded wireless modules. Our new HL Series brings the industry’s smallest, most scalable, most flexible family of embedded wireless devices to M2M customers and channels.

The HL Series features a compact common form factor for devices covering 2G, 3G, and 4G technologies; flexible mounting options, and pre-integrated firmware upgradability using our AirVantage cloud. The first products in the HL Series are now sampling with customers.

The addition of AnyDATA's M2M assets has bolstered our scale and leadership position in OEM solutions. The AnyDATA line of business adds aapproximately $10 million in annualized revenue to our OEM solutions product segment. More importantly, the AnyDATA asset brings us a leading position in the Korea market proven products, a proven sales in R&D team, and established customer relationships.

While relatively small, we believe that the AnyDATA M2M asset represents a solid platform upon which we can build a larger, stronger, more profitable business in Korea and other markets.

Moving to enterprise solutions, Q3 was an excellent quarter for our enterprise solution segment. Revenue increased by 38% year-over-year to $16.4 million. The strong growth was driven primarily by our new AirLink gateway products including our 4G Gx440, and our 3G LS300 devices.

We also experienced record revenue contribution from Europe. There’s (large) device to cloud customers such as Atlas Copco continue to deploy. Our AirVantage management service cloud offering continues to show solid adoption among our customers.

While the revenue contribution at this point is modest, the AirVantage management service creates meaningful competitive barriers and provides tangible value to our customers. We also secured an important milestone win for our AirVantage cloud services with the leading global provider of Smart Metering solutions. This represents another important endorsement of our device to cloud strategy securing an embedded module of design win, and also providing a seamless secure connection from the Smart Meter to the cloud with a collection of metering data.

In September, we launched the M2M Solution Exchange, which showcases real world Sierra Wireless enabled solution that have proven and deployed across a variety of segments including fleet and asset management, digital signage, business continuity, and smart grid. It’s a unique program that we believe highlights our leadership position while delivering great value to partners and customers.

I’ll now turn the call back over to Dave who will provide more detail on our Q3 financial results and Q4 guidance. Dave?

David McLennan

Thanks, Jason. Please 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.

Again, some of the key metrics Q3 with another solid quarter for the company -- I’ll start with reported results versus guidance. Revenue was a record $112.3 million and was within our guidance range of $111 million to $150 million.

Similarly, our non-GAAP earnings from continuing operations of $2.4 million was within our guidance range and reflects continued solid gross margin and OpEx management. Our non-GAAP earnings from continuing operations of $3.5 million or $0.11 per share were above our guidance range. This improvement includes the impact of certain reorganization initiatives as we transition our business, which are favorably affecting our effective tax rate.

Net earnings from continuing operations for the current quarter include a year-to-date tax recovery. A portion of that recovery amounting to half a million dollars or $0.02 per share relates to the first half of the year. Adjusting (inaudible) impact normalized Q3 non-GAAP earnings for $3 million or $0.09 per share.

As a reminder, the reconciliation between our GAAP and non-GAAP result 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 and disposition costs, acquisition amortization, asset impairments, integration costs, restructuring costs, foreign exchange gains or losses on the translation of balance sheet accounts, and certain tax adjustments.

Taking a more detailed look at revenue, total Q3 revenue of $112.3 million was up 12% year-over-year and up 2% sequentially from Q2. Revenue from OEM solutions was solid at $95.9 million representing 9% year-over-year and 1% sequential growth.

Revenue from the enterprise solutions group grew strongly to $16.4 million representing a 38% year-over-year increase and 13% sequentially. This growth reflects the continued success with our new 3g and 4G AirLink gateway products.

It’s safe to mention Q3 results showed improving profitability and leverage building on the trend from the past few quarters. Our growth margin remains solid at 33.4% up from 31.1% in Q3 of 20112. The year-over-year increase was attributable to product cost reduction as well as advantageous product mix. Sequentially, gross margin was flat and in line with our expectations.

Our key profitability in metrics continued to improve in the quarter and reflect the leverage in the business model as we grow the top line, experience solid gross margins, and keep operating expenses stable. Adjusted EBITDA improved at $5.9 million in Q3 as an increase of 81% year-over-year and 20% sequentially. Non-GAAP earnings from continuing operations of $2.4 million grew substantially on a year-over-year basis and increased 60% sequentially.

Looking at our balance sheet, our balance sheet remained strong and puts us in an excellent financial position to execute on our growth strategy. Cash generation in Q3 was exceptional. Driven by working capital improvements, we generated $19.1 million of cash from operations. This was partially offset by capital expenditures of $4.4 million and $2.9 million used in financing in other activities. In total, during Q3, our cash then was increased by $11.8 million to $188.4 million.

Moving on to guidance, the guidance we are providing for the fourth quarter of 2013 excludes any impact on the acquisition of the M2M assets with AnyDATA. We expect revenue to be in the range of $112 million to $116 million. We expect gross margin percentage in OpEx be similar to Q3 levels. This results in earnings from operations of between $2.4 million and $3.3 million, net earnings from continuing operations of between $2.2 million and $3 million, and earnings per share of approximately $0.07 to $0.10.

We expect our tax rate in Q4 to be approximately 10% of non-GAAP earnings. We will continue to evolve our business structure to align with our M2M pure-play operations, which may result in further impact on our effective tax rate. At this point, we expect our 2014 effects to tax rate to be in the low and mid 20% range.

I’ll now turn the call back to Jason to summarize.

Jason Cohenour

Thank you, Dave. Our singular focus on the M2m opportunity is all about driving shareholder value. Organically our goal is to continue to drive revenue growth and expanding profitability as we secure new customer programs, launch new products, and expand into new segments and geographies such as Brazil, and now, Korea.

We also plan to put our strong balance sheet to work in acquiring great M2M companies that help us further expand our position in the value chain, strengthen margins, and drive growth. I believe our track record of doing this is proven. Since 2008 we've grown our M2M business organically and through acquisition from $158 million to $433 million, and we’ve done this while improving our margin profile and defensibility. Our aim is to do more of this, and in so doing, deliver a great return for shareholders.

So to summarize, Q3 was another solid quarter for the company. We delivered record revenue and strong growth in our profitability metrics once again demonstrating the leverage in our operating model.

As declared global leader in M2M, we believe we are exceptionally well positioned to capture the M2M growth opportunity. We have significant scale of blue chip customer base, a growing customer program pipeline, new differentiated products and solutions that span the M2M value chain. I believe that this collection of assets will not only enable long-term growth but margin expansion and defensibility as well.

Our balance sheet is very strong with nearly $190 million in cash and no debt. We have put some of our capital to work in acquiring the AnyDATA M2M assets bolstering our OEM solutions business and global position. Our goal is to further leverage our balance sheet and continue to accelerate growth and value creation through targeted M&A.

As I said earlier, we’ve got a successful track record of doing this and our M&A pipeline is active. I look forward to reporting on our progress at year end.

(Ian), that concludes our prepared remarks for today. And I’ll now hand the call back over to you so you can open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions].

And your first question comes from Mike Walkley at Canaccord Genuity. Your line is open, please go ahead.

Mike Walkley – Canaccord Genuity

Great. Thank you. Jason, you haven’t talked about the embedded laptop market, but that’s kind of a tough market in PCs. Was that market opportunities -- that’s still growing for you guys or is that a shrinking part of your business now? I know you don’t (break it up separately), just trying to get a feel for how that business might be affecting your overall business trend.

Jason Cohenour

Yes, it’s actually positively contributing, Mike. It was a very solid contribution during the quarter and it continues to grow. So our -- the expected positive impact of our share gains are playing out as we expected.

Mike Walkley – Canaccord Genuity

Okay, great. So with (inaudible) exiting your (inaudible) share gain is all set up second to your PC declining time.

Jason Cohenour

Yes, we are. Dell’s a great example of that, right. We were not a supplier to Dell until very recently. And now we’ve got a pretty interesting launch with them in Europe, which used to be the domain of Ericcson or NovoTel.

Mike Walkley – Canaccord Genuity

Okay. Thanks. And just in the overall M2M OEM solutions market with the -- some (big growths) in the different verticals that some of your competitors are trying to gain share. Have you seen any change in dynamics in terms of pricing pressure in any verticals or any -- more intense pricing pressure from (inaudible) or other place in the industry.

Jason Cohenour

I’d say pricing continues to be definitely a factor. So I don’t think it’s new. I don’t think it’s become more intense than it has been in the last two years, Mike. But, it is a competitive market and price is always a factor particularly in the OEM solution space. There lie a few reasons why we're very focused on creating differentiated solutions for OEM including embedded application frameworks and the like, and focusing a lot of time and attention in investment in building our cloud services offering. We can just put this in a differentiated position. It gives us more levers and dials to protect hardware growth margin and of course build the recurring revenue stream over time.

Mike Walkley - Canaccord Genuity

That’s pretty clear. Appreciate that. I just wanted to touch base on the auto opportunity. You called out some active design activity you're involved in now. But is it true my understanding based on some previous winds, you expect that business may be to ramp in the second half of '14 for some '15 car models, particularly talking about calendar '16 car models I think on your prepared script?

Jason Cohenour

Yeah, we do. We do expect to get some lift from existing customers and roll out as they expand into different models as an example and into different -- into new geographical launches of existing programs. So I think with our current basic customers we do or we're inclined to believe that automotive is a growth market for us in '14 and particularly in the second half.

Moving beyond that, my comments in the prepared remarks were really intended to highlight the level of activity. I would characterize it as extremely high, so lots of RFQs, lots of discussions with tier ones and directly with automotive OEM. So I think that that level of activity really results in significantly increased penetration in the coming years.

Mike Walkley - Canaccord Genuity

Yeah, that’s great. We'll be looking to some of those RFPs and make to see some of that leverage start falling to the model. Based on that, Dave, OpEx good job [controlling]next week they can see that based we [flattish] for the foreseeable future and any help you can give us on next year's tax rate now that you're in that would be great.

Jason Cohenour

Sure. As I mentioned, where we shift with our activities now we see of being in the low to mid 20s range, but we're still working on that.

Mike Walkley - Canaccord Genuity

Okay. Then apex should be pretty stable in the next year?

Jason Cohenour

Yeah. We're very focused on maintaining our apex levels. I think we've got some decent runway ahead of us in terms of top-line growth where we don't have to dramatically change our apex profile.

Mike Walkley - Canaccord Genuity

Okay, great. Thanks for taking my questions.

Jason Cohenour

Thanks, Mike.

Operator

Your next question comes from the line of Richard Tse from Cormark Securities. Your line is open. Please go ahead.

Richard Tse - Cormark Securities

Yeah, thank you. Just wondering if you guys have sort of stylish-made timelines for acquisitions. I know they are tough to tell until when these things are going to happen. But are you getting yourself like s six-month or 12-month window before you potentially make a decision to return some of that money to shareholders? Just a sense of what were you thinking on that right now.

Jason Cohenour

We did one in October. I repeat, we did one in October

Richard Tse - Cormark Securities

Yes, I mean a bigger one.

Jason Cohenour

I know it's small. I know it's small. Timeline in M&A is as soon as possible I guess. It's the way we characterized it. We got a very active funnel. We got active discussions underway and M&A it's not always easy. It will take some time. So when do we rethink capital allocation strategy? I chart it with a timeline on that, Richard.

I will point out that we've got a bit of balance in the capital allocation strategy. We have returned some by way of the NCID, not a whole lot admittedly but we have returned some and we're going to remain certainly open-minded on returning capital if the M&A picture doesn’t work out the way we believe it will.

Richard Tse - Cormark Securities

All right, okay.

Jason Cohenour

But again, I want to reiterate our primary track for deployment of the proceed is to accelerate growth through M&A.

Richard Tse - Cormark Securities

Okay. Your guidance for the upcoming quarter, I know that late relative to do an expectation, including our number here and may be our numbers are a bit too exuberant, but may be it's worth helping to put that in context. You said that event activities are pretty big. Would it be basis the size of last year just to give us some context that you are very active that you don’t want to have time two times. Can you comment on that?

Jason Cohenour

I'm not sure if I understood the question, Richard. Why don’t you [multiple speakers] you like the level of activity, an activity measure.

I would say it's definitely off. I think you're seems to be waking up, which is good. Now we haven't seen in that in revenue yet quite candidly. Europe continues to struggle from a revenue standpoint with most of the growth we're seeing coming from the Americas. But the activity level is up in Europe, definitely, so it's gone from in a deep slumber to some significant activity. Of course, that’s going to take a little while to turn into revenue.

I will point out that we had -- well it's a small contributor in our enterprise solutions. We actually had record revenue in Europe. So I think that's hopefully a good sign of increased business activity and we need the help in Europe frankly to drive a stronger organic growth rate. With respect to activity around automotive, I would say -- without putting a number on it, I would say the activity level is up significantly compared to a year ago.

Richard Tse - Cormark Securities

One follow-up question here for Dave. I think you talked about the tax impact. Did you say that without that take-up in terms of the tax recovery would have been [ninth share]?

David McLennan

That right, Richard. We booked a tax recovery in Q3 on a year to day basis of which half a million or 2 cents of that pertain to the first half.

Richard Tse - Cormark Securities

Okay. All right, great. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Paul Treiber from the RBC Capital Markets. Your line is open. Please go ahead.

Paul Treiber - RBC Capital Markets

Thanks very much. Thinking about the Q4 guidance, it looks that you applied about 2% to 6% year-over-year growth. I think in the past you said that you feel like the market growth is around 10%. Is there anything unusual about this Q4 why it might be a little lower? Does that perhaps relate to Europe zone in a bit of a [flunk]?

Jason Cohenour

I would say there's a bit of that, Paul, for sure. You pick the midpoint of guidance, you're right it's about a 4% year-over-year growth. Europe continues to be a factor. It's underperforming no doubt.

The other is, customer programs always have a little bit of call it volatility. We might have strength from a certain networking customer one quarter and we may not have at the next and then it returns the quarter after that. I characterize that as natural ebb and flow of customer program roll-out. We're probably not seeing the full impact of overall customer programs going in the right direction in Q4. It doesn’t mean customer programs go away, it means that a customer program may be having a soft period. I would choke it up the normal edge in flows of customer program, volatility and continuing softness in Europe.

Paul Treiber - RBC Capital Markets

In regards to the ascent flow, is it safe to say that last year's Q4 you saw a lot of the customer programs fall into that period and that’s what drove the strength last year?

Jason Cohenour

Yeah. I know -- by the way, it's an excellent point which I should have reiterated. Q4 last year, as you may recall, we characterized that as exceptional, so at the dot com for sure and the Q4 last year where a lot of things went right with respect to customer programs and certain things in the cost structure, et cetera. It does present us with a dot com. Nonetheless, we're picking out some single-digit growth against the dot com.

Paul Treiber - RBC Capital Markets

Around that Q1, is Q1 normally slipping down or is it more related against the ascent flows of these programs when they start?

Jason Cohenour

It's a little about, but I would say we are normally inclined to look at Q1 as flatted down.

Paul Treiber - RBC Capital Markets

Okay. Moving on to M&A, it seems like valuations in the space, the M&A space, have increased in the public markets. Are you seeing -- is it not a factor when you're looking at potential targets and how are you approaching that?

Jason Cohenour

I'd say each situation is different. I'd start there and if you look at the small any-data acquisition as an example that was done a day very fair, may be favorable valuation for Sierra Wireless. I'll also say as you look at target setter a bit further up the value chain they tend to be more expensive at the layer growth and profitability on top than the expectations go higher from there. The way we think about it is if a target fits our key criteria, strategic fits, financial impact, opportunity for growth synergies and it got all those other good characteristics, we're going to have to pay market for it. That’s the way we think about it.

Paul Treiber - RBC Capital Markets

Thank you, excellent.

Jason Cohenour

Sure.

Operator

Your next question comes from Tim Quillin at Stephens Incorporated. Your line is open.

Tim Quillin – Stephens Incorporated

Hi. Good afternoon.

Jason Cohenour

Hi, Tim.

Tim Quillin – Stephens Incorporated

Did you talk about what the organic growth rate was? I think you still have about a month of Sagemcom in there.

Jason Cohenour

We didn’t talk about the organic growth rate. Sagemcom has now been part of the company for close to a full year, so frankly it's up to -- I would say scrape that out. But if you look at contribution from legacy Sagemcom customers and products as a measure, we had organic growth in Q3 and of course going into Q4 it's all organic growth.

Tim Quillin – Stephens Incorporated

Right. It looks like not only for the fourth quarter but I think on organic basis it's going to be a relatively slow growth year. Is there a level of confidence that trends would change in 2014 or do you go into 2014 thinking that may be you have some backups, strengthen automotive, but Europe is still weak and may be the type of organic growth we saw in 2013 is the right way to think about it in 2014 as well?

Jason Cohenour

I'm encouraged by the level of activity I'm starting to see in Europe, although as I said earlier that does take time to turn into revenue. We still believe that mid to long term, our expectations of ourselves, 10% to 15% year-over-year growth; I think in the mid-term no. We're much more comfortable at the low end of that range. So that’s our expectation and I think that given the level of business activity and signs this, the strength of growth in enterprise solutions, I think that’s a very reasonable expectation. Our expectation is longer term that that growth rate picks up given the number of new customer programs that we've won and given the level of activity in place just like automotive.

Tim Quillin – Stephens Incorporated

Then on AnyDATA, I think your guidance does not include AnyDATA for the fourth quarter, but you do expect -- I think you'd expect some kind of contribution this quarter. How should we think about that?

Jason Cohenour

We do. Yeah, guidance does not include any contribution from AnyDATA and the way to think about AnyDATA in the quarter is about [inaudible] about two weeks of the quarter. I think we close the AnyDATA transaction on October 17th and annualized revenue run rate is $10 million.

Tim Quillin – Stephens Incorporated

Okay, that’s fair. Last question is around [inaudible] and it sounds like you're in another interesting wind on the smart metering side. But as you're getting this module design wind, how often are you getting a shot at pitching your advantage and are your wind rates of adding your advantage to module is going on? Thank you.

Jason Cohenour

Sure. May be I'll start first with AirLink gateways and routers, and I would say that our hit rate in selling AirVantage management services is definitely going up significantly? Now these are lower volume deals, but higher output deals, and so I'm very encouraged of what wee there and I would characterize our wind with a smart metering company, an OEM wind, as another important milestone, we reported on another one last quarter.

So I say it's a start of a trend. It's a way to think about it. The hit rate of selling your Vantage services along with getting an embedded module wind is still low. We still have I would say quite a ways to go but we're very focused on that. I do believe that AirVantage is already creating differentiation for us in the sale process and every situation we're getting increasing interest. So my expectation is increase in hit rate will follow, but it will also take time.

Tim Quillin – Stephens Incorporated

All right, thank you.

Jason Cohenour

You're welcome.

Operator

Your next question comes from Todd Coupland at CIBC. Your line is now open.

Todd Coupland - CIBC World Markets

Good evening, everyone.

Jason Cohenour

[Inaudible].

Todd Coupland - CIBC World Markets

I just wanted to come back to the organic growth potential in the overall market and you in particular. If the market is 5, 6 points now and you still have Europe as a drag in auto second of the year, can the business pop back up to 15% growth with the turnaround in the second half for 2014? I think 10% to 15% up is where consensus revenue is for '14, which is kind of double the rate that you're currently experiencing. I was wondering if you could just highlight what you think are the key drivers in '14, not design winds but actually revenue that you think can contribute in a year. You don’t have to give an exact percentage of growth obviously, but just what are the key drivers to get that revenue in for next year. Thanks.

Jason Cohenour

Sure, thanks. Hey, I'll give it a number I think. We have been talking about 10% to 15% organic growth. I think in the midterm candidly that’s code for '14 and the midterm were more comfortable at the low end of that range, that’s what we think about at the time. What's driving that is we've got a strong pipeline of customer programs. These rolled out over time, so we expect that’s going to be a driver of revenue. We expect further growth in our enterprise solutions which has experienced, I would say, very strong growth in the last year. We expect – we expect strong growth to continue there, of course, of the smaller base. And those are the key drivers. At third is another – an important third is the launch of new products – new embedded products like our H.L. series. So, we're pretty enthusiastic about that. Again, it's going to pick a little time to roll out. We expect to have our first commercial product in market in Q3 and successor products to follow over the course of the year and we view that as a very important product for, I would say, bolstering our position in small and medium-sized accounts and through distribution. So, combinations of customer programs, growth and enterprise, plus new products are what we see as the key drivers for '14.

(Ian), are there any more questions?

Operator

There is one…

Unidentified Analyst

I'm sorry. I'm here.

Unidentified Company Representative

Hello? OK.

Unidentified Analyst: I'm sorry about that. Just a couple of quick more – couple quick other questions. You talked about in Q4 customer volatility. What end market is causing that volatility in the fourth quarter?

Unidentified Company Representative: I think – actually I talked about it in a more abstract term. I said Q4 '12 was a quarter that was particularly strong. There's lot of customer programs that went right and a lot of things went right in the gross structure and that braces upfront for us as we look at Q4 '13. And then I went on to further say that, you know, even when we target, you know, closer to a 10% organic growth rate, that’s going to happen every quarter because of this volatility, you know, where you got, you know, customer programs that do great one quarter and not as great the – not as great the next quarter.

Unidentified Analyst

OK. That’s helpful clarification. Lastly, on your balance sheet, so if AnyDATA was – what I would, I guess, consider a (talking) acquisition to position yourself geographically, when you look at your (M&A) pipeline, is that the kind of deal you’re looking at or are you actually considering transformational deals as well? Maybe just give us some color on that. Did you have a very large cash position in AnyDATA type deals will take you a while to work your way through that? Thanks a lot.

Jason Cohenour

Yes, yes, yes. No, sure. The AnyDATA deal I would be was opportunistic and that was a sale process and an interesting opportunity to strengthen a bit (inaudible) in Korea and I would say it is not characteristic of the typical targets in our funnel.

Most targets are a bit bigger to significantly bigger and I would say at this point, there are no targets in our funnel that I would consider to be transformational or no active targets in our funnel that I would consider to be transformational. So, I would set the -- I'm going to set your expectation at something north of AnyDATA in terms of size and impact but short of transformational is the most likely short-term outcome.

Unidentified Analyst

Okay. That’s great. Thanks a lot. Have a good night guys.

Jason Cohenour

Sure, thanks, (Ken).

Operator

And you last question comes from John Bright at Avondale Partners. Your line is now open.

John Bright - Avondale Partners

Thank you. Jason, that’s a wide range.

Jason Cohenour

Well, see, let me look at my funnel. I’ll give you some specific name.

John Bright - Avondale Partners

(Inaudible) that’s a wide range. Couple clean up in these questions first, Dave, AnyDATA, the main revenues will be thinking about 2.5 million in revenue next quarter is not including in guidance. Did I understand that correctly?

David McLennan

There is a -- that is the annualized rate. There is a bit of flux in the quarter but that’s not a bad number and remember though that is not in for the full quarter.

John Bright - Avondale Partners

Got it, got it. Okay. Jason, the key story in the enterprise speaks business it just performed stellar in this quarter. I think at 38% or so, talk about the verticals driving enterprise number one and also what are the competitive differentiation that’s helping you win that business?

Jason Cohenour

So, some of the key verticals are many of the same verticals that we sell into with OEM solution. Think of it as just another layer of the value chain. So, energy, we’ve always had a strong position with energy companies utility for our enterprise products. Field service is another key area, public safety; so police, fire, EMS all these significant drivers. And generally, what I would call business continuity and that usually aligns well with retail establishments where are our enterprise solutions are used mainly for business continuity, so disaster recovery if your wired, broadband goes down as an example.

So, key drivers for us in that business or key differentiators, no doubt it’s –- a huge part of it is AirVantage, and I don’t mean to overstate at all. It is truly a huge part of our differentiation as we go into every AirLink sales situation. We are actively positioning and selling AirVantage as well.

And that leads to significant differentiation particularly when you hook it up with the embedded intelligence that are in the AirLink devices. So, if you put the cloud together with these intelligent devices, you can do things like create new applications in the cloud and push them down to all your devices or create new policies in the cloud and push it down to all your devices.

Again, device to cloud is a significant –- continues to be a significant differentiator in that space for us.

John Bright - Avondale Partners

This is a difficult question to ask properly. So let’s see if I can do it. How much of the revenue is not necessarily recurring, but given the shorter or shall we say, longer product cycle that you’re morphing into as a company, how much of that revenue is associated now with longer product cycles? Does that make sense?

Jason Cohenour

Yes, maybe I’ll spin it a little bit differently, John. I would say as you look to 2014, nearly all of our OEM solutions revenue is going to come from existing customers and existing programs. We’ll have maybe a couple of new programs launched throughout the year well. We’ll have several launches throughout the year, but for the most part, we look at ‘14 and probably 90% of our OEM solutions revenue driven by existing customer program wins.

So I know that’s not exactly what you asked, but that’s the way we think about it. And in enterprise, it’s a little different than that, I would say that there is more of a book shift characteristic to enterprise. So while we’re not necessarily launching a lot of new products to drive enterprise, we’ll be launching some. But while we won’t be launching a lot like in the AirCard days that business is more of a book shift characteristic –- active sales funnel but in any given period or any given six-month period, you’re booking that business and shifting that business.

Very unlike OEM where you have –- you get a design win 12 months earlier you hit market, and then roll those programs out with customers. Does that make sense?

John Bright - Avondale Partners

It does and it’s a good way to spin it. Dave, on the enterprise side, should we think and this is a guidance question, should we think sequentially that that will be up?

David McLennan

Though I don’t want to get into segmented guidance -- I will note that we had a very, very strong quarter in Q3, right, in enterprise.

John Bright - Avondale Partners

All right. Jason, I’ll move to an M&A question to close it. Do you want to share anything as far as a geographic focus or a vertical focus?

Jason Cohenour

Well, I would say, I know we just did a deal in Asia, but the geographical focus actually is mainly North America and Europe that’s in -- and of course we have names in the funnel from Asia too, but the focus has really been North America and Europe.

The kind of targets we’re not putting market segments on, the kinds of targets are –- tend to be clustered around our enterprise solutions, line of business. So, they are services company that help us scale our advantage. They’re hardware companies that help us scale our high margin rugged gateway and router business. And serving either the same or very similar segments that we currently serve.

John Bright - Avondale Partners

Gentlemen, thank you.

Jason Cohenour

Thanks a lot, John.

Operator

You now have one question left from Tim Quillin at Stephens Incorporated. Your line is now open.

Tim Quillin – Stephens Inc.

Thank you for taking my follow up. And Jason, could you just give us a little bit of a sense of ASP trends that you’ve seen in the module business in 2013 and any kind of early read on expectations for 2014?

Jason Cohenour

Sure. I will say that if you look at the entire OEM solutions product line up, the ASPs have been remarkably consistent. Now, that’s of course driven by mix when you launch a new 3G product and you sell more 3G, and 2G goes down that helps to prop up overall ASP. But think about OEM module ASPs as basically, black.

Now, if you look at individual products within that product lineup, if you have a 2G product at the start of the year, what price it’s going to be -- that same product price is going to be at the end of the year? It’s probably going to be down 5% to 10%. But again, overall ASP is consistent.

Tim Quillin – Stephens Inc.

And in 2014, you’ve voiced that mix improvement can offset that kind of natural decline as well.

Jason Cohenour

Yes, I think so. I think we’ll see the same phenomenon in 2014.

Tim Quillin – Stephens Inc.

Okay. And just last question, I know it’s a small acquisition, but what kind of margin profile would AnyDATA have? Thank you.

Jason Cohenour

On the operating margin, it’s just about (inaudible) is the way to think about it. While operating margins modestly profitable is the way you think about it. Gross margins today in the AnyDATA business is a bit below ours is the way I characterize it, but we’re also in an expensive factory. So we’ve got to transition those products into our own factories and transition the component purchases through our own procurement channels and that so effectively drive the cost of the products down.

And with that, I think –- well, over time we’ll get those margins consistent with our OEM module margins.

Tim Quillin – Stephens Inc.

Okay, great. Thank you.

Jason Cohenour

Thanks. Ian, I think that’s if I’m not mistaken, that was our last question.

Operator

That’s right. There are no further questions.

Jason Cohenour

So I’ll thank everybody for joining today’s call. And as usual, management is available here in Vancouver should you have any follow up questions.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sierra Wireless' CEO Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts