Sierra Wireless' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Sierra Wireless, (SWIR)

Sierra Wireless, Inc. (NASDAQ:SWIR)

Q4 2013 Earnings Conference Call

February 05, 2014 05:30 PM ET

Executives

Jason Cohenour - CEO

David McLennan - CFO

Analysts

Tim Quillin - Stephens

Mike Walkley - Canaccord Genuity

Scott Tenner - CD Securities

John Bright - Avondale Partners

Peter Misek - Jefferies & Company

Paul Treiber - RBC Capital Markets

Todd Coupland - CIBC

Richard Tse - Cormark Securities

Daniel Kim - Paradigm Capital

Operator

Good afternoon, ladies and gentlemen, and welcome to the Sierra Wireless Fourth 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 and instructions will be provided at that time. I would like to remind everyone that this call is being recorded today, Wednesday, February 5, 2014 at 5:30 PM Eastern Standard 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. David McLennan, Chief Financial Officer. Please go ahead, gentlemen.

David McLennan

Thanks Candice 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 it will be available on our website following the call.

Today's agenda for the call is as follows. Firstly, Jason will provide a high level business overview. I will then provide a more detailed overview of our fourth quarter 2013 financial results as well as guidance for the first quarter of 2014. Following that, Jason will provide a brief summary and then we’ll finish up with a Q&A session.

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 constitutes forward-looking statements. These statements include our financial guidance for the first quarter of 2014 and commentary regarding the longer term outlook for our 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, which can be found on SEDAR and EDGAR as well as in our regulatory filings. This presentation should also be viewed in conjunction with our press release and with the supplementary information on our website.

With that over to you Jason to provide some highlights.

Jason Cohenour

Thank you, Dave, and good afternoon everyone. I’ll begin with a summary of the past year. 2013 was truly a transformation year for the company and one of improving operational results as well. We started the year with the sale of our AirCard assets to NETGEAR, marking a big move in our transformation into the global leading peer play in M2M.

Since the close of the AirCard transaction in April, we’ve been singularly focused on pursuing the secular growth and value creation opportunity in M2M, both organically and inorganically. Operationally, we executed on our organic growth plan, growing revenue by 11% year-over-year to a record $442 million. We also significantly improved profitability, growing adjusted EBTIDA by 48% to $18.7 million, demonstrating the emerging leverage in our 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 and this last month announcing the planned acquisition of In Motion Technology.

Now let’s take a closer look at our two different product segments. Our OEM solutions segment delivered steady growth in Q4 with record revenue of $101.8 million, up 7% year-over-year. Gross margin in OEM solutions was 29% in Q4, a bit lower than recent quarters as a result of higher than usual revenue contribution from high volume automotive and mobile computing customers.

For the full year, 2013, OEM solutions generated $382 million in revenue, representing 10% year-over-year growth and gross margin of 30%. As the clear global leader in OEM solutions, we’re delivering on our expectation of steady growth. For the full year 2013, growth in the Americas was particularly strong while we continue to face macro headwinds in Europe.

Innovation continues to be a key contributor to our leadership position, and in 2013 we delivered a number of new products and solutions that we believe differentiate us in the market and will fuel our future growth. Early in the year we introduced our new family of smart modules, which are absolutely unique in the market, combining a multi core architecture, new embedded application framework and pre-integrated AirVantage cloud services.

The result is an entire M2M ecosystem on a module. Enabling OEM customers to develop and run their application directly on the module and to deploy and manage their devices in the cloud. This helps to reduce the customers’ overall development time and total cost of ownership. I’m pleased to report that a number of customers are now actively developing solutions based on these new smart module platforms.

Throughout the year we also continue to stake our claim as the clear 4G technology leader, releasing a number of new module devices for 4G networks around the world including the AR7 the world’s first 4G embedded module designed specifically for the automotive market. And then in Q4 we launched a powerful new series of embedded wireless modules that are the industry’s smallest, most scalable, most flexible family of embedded wireless devices. The HL series features a compact common form factor covering 2G, 3G and 4G technologies flexible mounting options and pre-integrated firmware upgradability using our AirVantage cloud. Since announcement we have secured a number of new design wins with the HL series and the overall market response has been very positive.

Customers continue to drive our business forward in 2013, with the extension of key rollout such as Chrysler and Verizon Telematics and program design wins with new and existing customers and key segments such as automotive, energy, networking, security, payment and mobile computing. I would characterize the number of new program opportunities emerging in the past six months as extremely high and we’re competing hard to win a bit more than our fair share.

During the year we also secured milestone wins for our full device to cloud offering with OEM customers in the energy and industrial segments. In each case securing an embedded module design win plus ongoing AirVantage cloud services. In 2014, we expect to increase our AirVantage traction with OEM customers considerably as we bundle new offers and ramp up our sales and marketing efforts. And while driving our business organically we also strengthened our position through M&A, capturing a solid full year contribution from the acquired Sagemcom and acquiring the AnyDATA M2M business in Q4. Both acquisitions have added sales, marketing and R&D talent well also bolstering our product line and position in key regions such as Brazil and Korea.

Moving to enterprise solutions, Q4 was another strong quarter for this segment. Revenue increased by 15% year-over-year to a record $16.8 million and gross margin was a solid 53%. For the full year 2013 the result was similar, strong year-over-year revenue growth of 18% to a record $59.9 million and solid gross margin of 51%. Q4 and full year growth was driven primarily by our new AirLink gateway products including the 4G GX440 and 3G LS300 devices as well as growing contribution from Europe.

So it’s quite clear that new products represent an important growth driver and differentiator for our enterprise business. Recognizing this, our new product development investments continue at a steady pace and we recently introduced another new AirLink product the ES440 designed specifically for branch office business continuity applications. We view this space as having very interesting profitable growth prospects as well as opportunities to capture more of the solution value chain.

ES440 is being introduced to customers and channels now and we expect significant revenue contribution from the product in 2014. Adoption of our latest next generation AirVantage cloud offering continued to build momentum during 2013. Large customers such as Expresso continued to add devices and subscribers at a steady rate and new customers such as Veolia Water were commissioned on the platform and launched in the market. Additionally our hit rate per AirLink gateway customers adopting AirVantage for device management services continued to improve. We continue to be enthusiastic about the opportunity to grow our AirVantage subscriber and recurring revenue base and about the differentiation that it brings to our device to cloud offering. And while we see continued strong organic growth opportunities in enterprise solutions, we also see opportunities to accelerate our growth and value creation through M&A.

The recent announcement of our planned acquisition of Vancouver based In Motion technology provides a good example of the attractive acquisition opportunities in mobile enterprise solutions.

Our planned acquisition of In Motion a leading provider of mobile enterprise solutions for mission critical applications provides a perfect illustration of the type of growth and value creation opportunities that exist for Sierra Wireless in the enterprise solutions market. With In Motion, we rapidly built scale in our enterprise solutions business. Adding $15 million in the high margin revenue from complementary products and talented engineering sales and marketing teams that will help accelerate new product development cycles and sales cycles for the combined organization.

With In Motion we will consolidate a clear market leadership position in high end, high margin gateways, routers and cloud services for very interesting growth segments such as public safety, transit and commercial fleet. Together we will create an even more powerful force and aim to drive rapid profitable growth, while building a highly defensible business.

We believe that In Motion is an excellent fit for Sierra Wireless and that there are other interesting consolidation opportunities in the enterprise segment for driving growth and value creation. I will now turn the call over to Dave, who’ll provide more detail on the Q4 financial results and Q1 2014 guidance.

Dave McLennan

Please note that we report our financial results on a U.S. GAAP basis, however we also present non-GAAP results in order to provide a better understanding of our operating performance. Focusing on Q4, we have presented our non-GAAP results with and without the impact of the AnyDATA's M2M asset acquisition which closed part way through the quarter and was not included in our guidance for Q4. The acquired AnyDATA assets contributed $1.6 million of revenue in Q4 and was breakeven at the operating level during the partial quarter that we owned the business.

Q4 was a very solid quarter for the Company from a revenue perspective. Non-GAAP results excluding the contribution from AnyDATA and comparing those to guidance, revenue was a record $117 million coming in above our Q4 guidance range of $112 million to $116 million. Gross margin for the quarter was 32.6% down sequentially from Q3 reflecting that product mix of business for the period. Specifically, while our high margin enterprise solutions segment continue to make a solid revenue in gross margin contribution, this impact was offset by strong contributions from high volume lower margin customers in OEM solutions, particularly in the PC and automotive market segments.

Non-GAAP operating expenses for the quarter were $35.5 million; this is up sequentially from Q3 reflecting additional investments in sales and marketing and product development particularly in our enterprise segment. Our non-GAAP earnings from continuing operations were $2.6 million within our guidance range and non-GAAP net earnings from continuing operations were $3.1 million or $0.10 per share which is at the high end of our range reflecting in more favorable tax situation driven by the mix of income between our various jurisdictions.

As a reminder, the reconciliation between our GAAP and non-GAAP results is provided in the press release as well as in the investor relation 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, FX gains or losses on the translation of balance sheet accounts, and certain tax adjustments.

I’d also like to draw your attention to the additional segment disclosure which can be found on the last page of the press release. This provides a quarterly comparison of revenue and gross margin for each of our OEM and enterprise segments for 2012 and 2013. Taking a more detailed look at Q4 including the impact of the acquired AnyDATA assets total Q4 revenue of a $118.6 million was up 8% year-over-year and 6% sequentially from Q3.

Revenue from OEM solutions was a $101.8 million representing 7% year-over-year growth and 6% sequential growth. Revenue from enterprise solutions grew strongly to $16.8 million representing a 15% year-over-year increase and a 2% sequential increase.

Our key profitability metrics while down year-over-year against a particularly strong comparable quarter in Q4 2012 did improve sequentially compared to Q3 of 2013. Q4 adjusted EBITDA was $6.2 million representing a 5% sequential increase and Q4 non-GAAP earnings from continuing operations were $2.6 million up 8% over Q3.

For the full year, our continuing business to revenue of $441.9 million in 2013 representing 11% year-over-year growth. On a non-GAAP basis, adjusted EBITDA increased by 48% year-over-year to $18.7 million and earnings from continuing operations were up considerably to $5 million up from $0.9 million in 2012 reflecting an improvement in the business model during the year driven by revenue growth and stronger gross margins.

Our balance sheet remains very strong and puts us in a excellent financial position to execute on our organic and M&A strategy. In total, we used 8.5 million of cash in the quarter; this includes $5.2 million to fund the purchase of any data and increased working capita primarily a result of carrying higher receivables during the quarter. At the end of the year, our cash and short term investment balance that did a $179.9 million up significantly from this point last year reflecting their proceeds from the AirCard sale and positive free cash flow generated by the business partially offset by the use of cash to purchase any data.

Moving on to guidance, the guidance we are providing for the first quarter of 2014 excludes any impact from the acquisition of In Motion technology and what is typically a seasonally low quarter we expect solid year-over-year revenue growth and earnings compared to Q1 of 2012. We expect revenue to be in the range of a $117 million to $121 million up 15% to 19% on a year-over-year basis in relatively flat on a sequential basis compared to Q4. We expect gross margin to decrease slightly from the fourth quarter of 2013 due to a shift in product mix including normal seasonally lower revenue from our higher margin enterprise solutions segments. We expect to seasonal rebound in enterprise solutions revenue in Q2.

We expect operating expenses to increase slightly compared to Q4 as a result of higher new products certification cost targeted investment in the sales and marketing capability and a full quarter of expenses related to the AnyDATA acquired business. This results in earnings from operations of between $500,000 and $1.5 million, net earnings from continuing operations of between $400,000 and $1.2 million, and earnings per share of approximately $0.01 to $0.04. We expect our tax rate in Q1 to be approximately 20% of non-GAAP earnings. And overall throughout 2014, we expect continued growth and improving profitability compared to 2013.

I’ll now turn the call back to Jason for a summary.

Jason Cohenour

Thank you, Dave. So to summarize, Q4 was another solid quarter of record revenue and profitable growth, brings to a close has been transformational year for Sierra Wireless. For the full year 2013, we also delivered record revenue and strong year-over-year growth in our profitability metrics demonstrating leverage in our operating model.

Our singular focus on M2M is all about creating value. As the clear global leader, we believe we’re exceptionally well positioned to capture the long-term M2M growth opportunity. We have significant scale of blue chip customer base, new customer design wins, and differentiated products and solutions that span the M2M value chain. I believe this collection of assets will not only enable long-term growth but margin expansion and defensibility as well.

While we continue to drive profitable organic growth, 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 $442 million. We’ve done this while improving our margin profile and defensibility. Our aim is to extend this track record with the addition of more companies like AnyDATA and In Motion and in so doing deliver a great return for our shareholders.

Candice this concludes our prepared remarks. You can now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Tim Quillin with Stephens. Your line is now open.

Tim Quillin - Stephens

I’m Tim Quillin from Stephens. Thanks for taking my question. I’m wondering what you’re thinking in terms of mix not just between OEM solutions in enterprise but within those, I think as you’ve mentioned the gross margin on OEM was a little bit below normal in the quarter and the enterprise gross margins I think bounce around a little bit but within those businesses where would you expect gross margins to be trending in 2014?

Jason Cohenour

Our target for OEM, Tim, is 30. So, you saw in Q4, it’s little lower than that due to what I would term customer mix. And then with respect to the overall mix, as Dave indicated, we expect in Q1 to see seasonally softer enterprise revenue performance still up year-over-year but seasonally softer of with really strong Q4 and that will affect overall risk. So I would say, Q1, we kind of expect our OEM mix to be similar to what we saw in Q4.

And we expect to see our overall mix be less favorable because of the seasonality in enterprise. In Q2, we do expect to see a rebound in enterprise which will have a positive impact on overall mix. And our long-term target remains 35%. And through strong growth in enterprise holding OEM at the 30%, around 30%, and layering on high margin acquired assets like In Motion, I think we’ve got the formula for how to get there.

Tim Quillin - Stephens

Okay, and then keeping enterprise at 50% plus is that the target there?

Jason Cohenour

That’s correct.

Tim Quillin - Stephens

And then in terms of the OpEx, I don’t think it was anything major but you’ve talked about holding operating expenses relatively flat in dollar terms, you have some increases it sounds like plan for first quarter 2014, but how should we think about that relative to your previous target of holding them flat?

Jason Cohenour

I think while I make some comments and Dave is going to add. But I think Q1 probably like I said will be up a little bit for certainly reasons, we’re making very targeted but what I would term targeted investments in particular in sales and marketing and that’s an overall comment. And as I’ve messaged, I believe that we have opportunity to capture more opportunities in the market through increased investments in those areas. And we did also step up investments in enterprise R&D of it because we see great opportunities by accelerating the product roadmap. To having said that, we’re going to carefully manage the cost structure within a pretty tight that. Dave, you want to add to that?

David McLennan

Yes, if I just add that, we’re also - on boarding our acquisition, so any data was a partial quarter in Q4. We have $35.5 million of OpEx excluding any data, in Q1 OpEx is going to probably be about $600,000 or $700,000 from that acquisition. And then as Jason said we are making some targeted selective investments in a couple of areas particularly on the enterprise side and go-to-market capability. So, I would say you should expect Q1 OpEx in the 36.5 to slightly higher range.

Tim Quillin - Stephens

Okay, perfect. And just my last question is around AirVantage and I guess first, would you be willing to share kind of where that ended up in terms of revenue in 2013 but more generally I know your comments were relatively bullish about the outlook there. But any kind of sense of the growth, I know it’s a small base but is that a business that could double in 2014 or more? Thank you.

Jason Cohenour

Sure. So, I am probably not going to fully satisfy you on an answer on revenue from AirVantage but we did add a significant number of subscribers during 2013. We are bullish with respect to 2014. Do I think we can double revenue in 2014 from 2013? On a run rate basis I think we can, first you don’t know what the base is but I think we can. Because I think we are entering a phase now where the customer additions are quite visible combined with what I would say really accelerating our sales and marketing effort in particular with the OEM sales team.

So, I think that combination of factors we believe will accelerate the number of new customers getting signed up and then of course it takes a bit of time to digest them and turn them into revenue. So, doubling revenue run rate of a small base very feasible and hopefully by the end of 2014 we can give the street some more specifics on the operational KPIs in that business.

Operator

And your next question comes from Mike Walkley with Canaccord Genuity. Your line is now open.

Mike Walkley - Canaccord Genuity

Okay, thank you. Jason with a better outlook for the OEM solutions in Q1, are there any end markets or particular reasons where you are seeing better than normal seasonal strength?

Jason Cohenour

You sound like you have called Thomas’s Dad as my Mike. So, on OEM I might say, it’s fairly broad based the strength although PC OEM and automotive were clear drivers in Q4 and we expect them to be significant drivers in Q1 as well. I wouldn’t be surprised to see that more or less continue over the course of ’14, although if you look at our top 10 customer line-up, it’s fairly well distributed. There are automotive companies as you would expect. There is mobile computing companies as you expect but there is also networking companies on that list, payment companies on that list and even enterprise customers on that list. So, it’s still pretty well distributed very little customer concentration. But in Q4 and Q1 like I said I would point to automotive and mobile computing as probably the strongest of the drivers in OEM.

Mike Walkley - Canaccord Genuity

Great. And Jason, could you give us a sense on PC OEM, I think there is a concern of the PC market shrinking but you guys have been growing that business. Can you give us a sense of how it grew maybe in 2013 versus 2012 and if you think that’s a growth business again in 2014?

Jason Cohenour

Again we are going to be careful not to disclose specifics on every segment we sell in to but PC OEM was up in ’13 relative to ’12. And in particular I think it was, we had a pretty strong second half in the PC OEM and we are seeing the benefits of really share gain. I don’t think we have seen yet the benefit of increased penetration although we are hopeful to see that at some point in the coming periods. And we haven’t seen the negative impact of shrinking PC OEM sales. I think for us it’s, we still view it as a bit of a growth opportunity. We are not betting the company on it but we are seeing attractive profitable growth there mainly as a result of share gain. And in the future we are hopeful around seeing some growth as a result of increased penetration as well.

Of course we are not counting on overall growth in the PC market but we don’t need to see that and order for it to be a growth opportunity for us.

David McLennan

Mike, it’s Dave. I just add that this is, these sales are really into enterprises for the PC OEM business and that’s a little less sensitive to demand than the consumer side. So, it’s a little inflated from some of the ups and downs of the overall PC share market.

Mike Walkley - Canaccord Genuity

Okay, thanks David, that’s helpful too. And then just, you call this out as one of the impacts to gross margin, is it kind of materially below the solutions gross margin or just slightly below that 30% goal?

Jason Cohenour

In the guidance you are talking about?

Mike Walkley - Canaccord Genuity

Just overall from the PC OEM, you call that out as one of the pressures to margin what I thought I heard.

Jason Cohenour

So, it’s below the 30%, but I wouldn’t call it dramatically below.

Mike Walkley - Canaccord Genuity

Okay, great, that’s helpful. And just a reminder on the In Motion, when is that deal is supposed to close and [] in jumping back between couple calls. You say that is not in the guidance.

Jason Cohenour

That’s right Mike, so our Q1 guidance does not I include any numbers from In Motion and we’re on track to see that close early March possibly even late February but probably the first week of March is what we’re trying to do.

Operator

And your next question comes from Scott Tenner with CD Securities; your line is now open.

Scott Tenner - CD Securities

Hey Jason, I wanted to follow up on one of your comments from the prepared remarks on just to the initiatives around increasing the traction of their AirVantage with the OEM customer hoping to get a little more on that please.

Jason Cohenour

Sure, so kind of two tracks there Scott, one is gearing up our OEM solutions sales team and that is by a considerable margin it’s our largest sales team, and so couple of things there, we, just last month we completed I would say intensive sales training for that team and released a compensation plan that richly rewards them for AirVantage win, so that’s kind of the sales and marketing track if you will, we’re also, some of our targeted investments are around, a type that we call solution managers which is really an infield team to support the sales team in closing AirVantage deal, so that’s one of our targeted areas of investment, so I would put that in the category of gearing up the sales and marketing machine, and then on the product side, while I can’t give you specifics due to competitive reasons we’ll be putting together some bundles, you know basically service bundles and device bundles and getting those ready to launch into the market, so combination of gearing up sales and marketing plus some interesting bundles put through that channel are the real efforts.

Scott Tenner - CD Securities

That’s helpful, on the, just one reminder on that, the enterprise solutions business adjusted from the In Motion call that 15% to 20% growth that you reference there is that to be thought of as the organic number and then the acquisition of In Motion will be on top of that?

Jason Cohenour

Yes, that’s exactly the way you should think about it.

Scott Tenner - CD Securities

Okay, just one last question, maybe David, accounts receivable for this quarter, the jump up just wondering if that’s a, would you call that a function of linearity in the quarter or is that maybe also a function of maybe the profile of customers that were [indiscernible].

David McLennan

We did see a little bit of sales towards the back end of the quarter so that increases the number at the year end and we also see a slight increase in DSOs by a couple of days. So you’re DSOs went from about 56 days to 58 days or thereabouts, so the combination of those two things drove up receivables. That’s good news in that; you know that’s something on the strength of some revenue growth, so I think that’s good news.

Operator

Your next question comes from John Bright with Avondale Partners; your line is now open.

John Bright - Avondale Partners

Thank you, good evening. Jason you talked about certain modules in your prepared text you seemed to be pretty optimistic about that as a differentiated product and you mentioned some positive feedback as well, can you give us some tangible examples of where you think this might give you the best traction, maybe which particular vertical.

Jason Cohenour

You know John, I would say I would say it’s pretty broad base we’ve seen demand certainly in, in automotive, we’ve seen demand in, and I’ll speak generally about our smart module category. We’ve seen demand in automotive, we’ve seen demand in energy, we’ve seen demand in security, so again I would say it’s pretty broad-based we don’t see strong demand for smart module devices in mobile computing as an example, we tend not to see it in payment solutions, we tend not to see it in networking solutions.

John Bright - Avondale Partners

What do you think the common denominators are there?

Jason Cohenour

The common denominators I think are, I would say in general a willingness to consider alternative system architectures that take advantage of the capabilities that a product like ours has because the customer desires to basically lower overall solution costs. And that’s the trade off kind of lead to the customers, so on the, so you adopt a smart module you know and our support will get you to market faster, will help you lower your overall solution costs, of course the downside to the customer is they tend to be married to us for a very long time right, because they’re more deeply integrated with us, so there’s a bit of an architectural sale there and when we’re successful you know convincing the customer that the business imperative is around getting to market and lowering overall cost of goods we’re generally successful and where they’re religiously opposed to long marriages as we were less successful.

John Bright - Avondale Partners

Dave the seasonally softer enterprise I think in the first quarter you talked about anything that you attribute that in particular to?

Dave McLennan

It’s not an unusual pattern. So if you look at a year ago Q4 ’11 sorry Q4 ’12 to Q1 ’13 we saw similar pattern. Some of it is just how some of the customers’ budgets workout and drive demand and that can soften in Q1 and then pick up again later in the year.

John Bright - Avondale Partners

Jason on the acquisition front valuations yours as well as others have gone up. Is that becoming an impairment to maybe a company that you see and they’re seeing too the rise are bit too rosy right now?

Jason Cohenour

Well, we’ve seen some of that. So every situation is different John but certainly not only our valuation increase but successful IPOs like Fleetmatics and the sale of Hughes Telematics to Verizon going back even a bit further I think this is sort of affected expectations by in large but this is all it’s just all part of the process. And I think like I said each situation is different there are some situations where perhaps the sale is more of a strategic imperative and other targets think that they are firmly believe that they’re getting paid to wait. So we have to navigate all those situations and the market backdrop to find the right targets at the right price.

John Bright - Avondale Partners

How is the pipeline look today?

Jason Cohenour

Good, it’s active. I think we’re not going to be announcing a deal next week but I characterize it as active. We continue to have regular management meetings and are regularly exploring our opportunities mainly in the enterprise solutions category because our priority is to move up the value chain with our M&A activity. So we’re busy. We’ve done two deals here in four months and not sure that we can do a deal every two months but we’ll be busy.

John Bright - Avondale Partners

Still the one singles and doubles versus something transformational?

Jason Cohenour

I would say yes, singles and doubles would be nice to hit a triple but there is nothing in our funnel that I would call transformational.

Operator

And your next question comes from Peter Misek with Jefferies. Your line is now open.

Peter Misek - Jefferies & Company

Thank you. Just wanted to maybe explore a little bit the ASP I know you didn’t disclose it but some ASP trends. There is a general fear in the market that we have this big opportunity in into the things but that always modules including yourselves are going to see big pressure as competition gets aggressive. And maybe you can explore that a little bit and help us understand how you think about pricing, how you think about market share and then how you think of the value added solution, specifically on your software products and then how you build on top of just the module?

Jason Cohenour

I would characterize, so I would characterize the pricing environment Peter in large deals to be pretty intense. There are number of players who are chasing the large deals and the pricing environment is definitely tough. And we compete to win but compete to win and make money is the way I’d characterize that. But I’d also share with you that the overall market is highly-highly fragmented and it’s made up our customer base as an example 1,000s of customers. And so there are many-many of those customers who don’t have the negotiating power our pricing leverage that these big deal customers do. So we tend to get I would say fair ASPs there.

So no doubt we keep our eye on ASPs and we manage it very closely and our view now is right now is that we can manage the OEM solutions business at or around 30% gross margin and that means keeping pace, cost of goods keeping pace with cost of goods reductions, keeping pace within the ASP reductions.

Peter Misek - Jefferies & Company

And as you think of the competitive solution I’m specifically trying to understand it’s a highly fragmented market you do have modem players that has played with potential getting to the market Qualcomm comes in and out et cetera. And certainly the Internet of things has popped upon everybody’s radar. I was hoping to try and explore a little bit more the value add that you put on top of the module and how you feel like that can defend your margin longer term and how we can then get comfort that that 35% target is readily achievable?

Jason Cohenour

Sure. So by the way the business has made up of two pieces, don’t forget that, right. So, enterprise solutions, which is 50% plus gross margin and growing faster than the overall business, so that’s a significant mix lever there. So I think you are -- and then by the way much less price sensitive it’s not that price and that doesn’t matter, it does, but much less price sensitive than the big deal characteristics we often see in OEM solutions. So OEM solutions there is you kind of mentioned I would say disruptive potential disruptive moves and that’s always a risk of course we saw that with Qualcomm at one time in the PC OEM space and that was a tough chapter for us which we weathered and Qualcomm woke up and decided that wasn’t a good business for them and that was a little growth opportunity for us. So I think the disruptive threats will come and go, we’re not running the business per say on those disruptive threats, but we do focus very hard on differentiation in OEM solutions. And for us it’s all about embedded software capability. So giving the customer -- and we invest a tonne in this. Embedded application framework that will run on a Qualcomm based module that will run on a Intel based module, it will run on an ST based module. And so that they can port their applications regardless of the chipset platform that the module is running, that to us is real power. And it helps them to lower their overall cost of goods, because they can reduce an application processor as an example in their design. That coupled with cloud services that enables them to solve the mystery of how I get machine data from my machine and into my enterprise applications is a huge value.

So using a set of APIs that’s very easy for them to connect the key machine data and alerts with their enterprise applications I think is the stuff of real differentiation. By the way the stuff of real investment too, we spend a lot of money on it but it’s the stuff of real differentiation because again it goes to accelerating your path to market, accelerating the launch of your solution and also lowering your overall cost of the solution.

Peter Misek - Jefferies & Company

I guess that’s exactly what I was looking for in terms of an answer to the explanation. As we look at partnerships in that area with folks like Splunk who take that machine data and feed it to enterprises. I am not aware of you folks having anything like that and clearly they could leverage that API platform that you are talking about. Is there any plans or are there ways we should think about how you will partner in that market? How you will leverage that monetization platform, I think that could be very interesting opportunity and potentially a way to protect margins. I am just trying to understand that.

Jason Cohenour

Sure I think I referred to it a couple of times in the presentation. So we got two channels to -- more than two channels. Internally we have got two ways that we sell that or we bring AirVantage to market in one ways to our enterprise solutions sales. So every time an AirLink sales guy or an enterprise sales guy from our team sells an AirLink terminal he is also selling AirVantage cloud management services. You can deploy and manage that device, it’s becoming automatic and that also get’s pushed through our enterprise solutions of VAR channels, which is a very well established set of channels, tend to be smaller and more specialized VARs that sell into our enterprise customers.

And then the other channels as our OEM solution sales team, who is often on the pointy end. OEM decisions with respect to architecture, not only how they are architecturing the machine they need to deploy but also architecting their entire back end. So we’re engaged in that sale directly. We’re also engaged with system integrators and Expresso is a great example, we have worked with the wireless operator that Expresso selected. We also worked with a system integrator who had familiarity with Expresso’s back end they used all of APIs and cloud infrastructure to take the machine data out of coffee machines and populate their enterprise systems. We have got a relationship with them, is on web services as an example as well, so the customers can basically get their application set up in the cloud for zero capital cost.

But I think we’ll do more of the partnering on the system integrator side as we continue to prime the pump with our own successes in the field.

Peter Misek - Jefferies & Company

And sort of last question if I may and I don’t know if I just missed this but on currency movements we have obviously had some volatile and violent moves in the Canadian dollar and you guys have a big cost base in the Canadian dollars, so that actually helps you. Maybe you can help us understand to what extend you have got any hedging and how you think of the currency and how we should be modeling that going forward? Thank you and that’s it.

Dave McLennan

Hi Peter its Dave. Your Q4 if you look at Q4 sequentially to Q3 there was a fairly modest impact and actually the impact from the U.S. to Euro was offset by the Canadian to U.S. impact so kind of neutral. But I think if you look at -- so we don’t actually hedge on the euro side because there is a bit of a natural hedge there. We do have net exposure on our Canadian dollar expenses, we don’t typically hedge against that and you should think of that as approximately $100,000 of impact, every penny change there.

Operator

And your next question comes from Paul Treiber with RBC Capital Markets. Your line is now open.

Paul Treiber - RBC Capital Markets

I just wanted to delve on to seasonality. So, how much seasonality do you normally see in Q1 on the OEM business and then are there any unusual items in Q1 like new product launches so they’re driving OEM revenue that maybe less impact for Q2 or Q3 2014.

Jason Cohenour

Great question and -- so we’ve I would say in 2013, we did experience some seasonality in OEM solutions in Q1 although I’ll say you may recall we had a remarkably strong Q4 of 2012. So, we came off about really strong Q4 of ’12. So, probably that are combination of factors. I don’t think there is any seasonal pattern you can bet on quite candidly in OEM solutions. I will say in enterprise there is a better established although not perfect pattern but a better established seasonality pattern having to do with end customer buying cycles particularly in the public sector and in utilities in the like. We saw the seasonality impacts in Q1 of 2013 and enterprise were seeing a similar impact in Q1 2014 in enterprise. We are not seeing a parent seasonality impact in OEM.

Paul Treiber - RBC Capital Markets

So, the strength in OEM is there anything unusual that’s driving out that may not be sustainable through Q2 or beyond.

Jason Cohenour

Well, I think that we’re probably off to a stronger start in OEM than expected. We have no reason that we’re not going to have a solid steady growth here in OEM at this point we certainly don’t expect a dramatic drop off in Q2. But I would say we’re getting off to a stronger start than expected and our view as we look out right now is for continued steady growth for the full year in 2014 compared to 2013.

Paul Treiber - RBC Capital Markets

Okay. And following on that I believe in the prepared remarks activity or design when activity is extremely high. Are there any metrics you can share that maybe quantify that design win momentum or order backlog anything of that nature?

Jason Cohenour

Probably nothing that will satisfy you at this point in time, Paul. Frankly we’ll strive to get more publishable KPIs on that outside of what we use internally and that’s not a matter of not wanting to be transparent, it’s just a matter of getting confidence frankly in the internal data before we disclose it more widely and we need to qualify that is actually a meaningful parameter of where the business is heading.

So, I’m happy to provide the kind of the color commentary on the amount of activity we see which is in that six month window, the highest I’ve ever seen since being in this business and a number of a large deals that are happening now. Now, these are deals by the way that won’t turn into revenue for one to two plus years depending on the segment. But there are significant numbers of large deals happening right now.

Paul Treiber - RBC Capital Markets

Okay. And then just one last one on Europe, what’s your outlook on Europe it looks like car registrations are beginning to pick up here, are you seeing an uptake in your orders and design win activity.

Jason Cohenour

Well we’re seeing on the design win side we’re seeing a lot of activity in Europe and I would characterize that as a rush on the part of automotive manufactures to be to make sure there are compliant with the eCall initiative out of schedule that they are required to be compliant. So, certainly there is that and I would say we are on the hopeful side between now and eCall compliance were more on the hopeful side and we’ve got reason to be somewhat optimistic more on the hopeful that car makers that currently have solutions designed in will kind of turn up the volume on their marketing efforts, right. Because right now these are connected services, they’re voluntary, driven by demand it’s not driven by the government regulation and we do see some car makers getting more serious about I would say pushing that harder in the market place.

Operator

Thank you. Next question comes from Todd Coupland with CIBC. Your line is now open

Todd Coupland - CIBC

OpEx question and sector question if I could, so I think you, Dave I think you mentioned $36.5 million or roughly there for Q1. What would be the proforma OpEx number include your most recent acquisition in terms of modeling out for later in the year?

David McLennan

Are you referring to In Motion going forward or AnyDATA that we?

Todd Coupland - CIBC World Markets

No, In Motion fully loaded.

David McLennan

At this point, I’m not prepared to give metrics on the business. We will be closing that in next three or four weeks and I think you should expect that to be incorporated in our guidance for Q2. But at this point, I’m not prepared to give metrics. I will say just size of the business though we’re - it’s $15 million in revenue last year, $15 million U.S. it’s approximately a 50% gross margin business and running around breakeven.

Todd Coupland - CIBC World Markets

Okay and then in terms of the better than expected OEM performance, so far the segments are auto and PCs, is that about right?

David McLennan

So, I’ll comment on that, Todd. We’ve mentioned high volume automotive and PC customers in the context of the weaker gross margin in Q4 relative to Q3. And certainly on an incremental basis, revenue from those segments and those high volume customers was stronger perhaps than we expected but underlying the vast majority of the revenue of course is a number of other customers across lots of other segments. And I think I’ve mentioned if you look at our top 10 customer list, there are a number of different segments represented in the top 10 customer list.

Todd Coupland - CIBC World Markets

And in terms of the auto that I guess that’s North American demand, I’m implying by your comment on your European outlook to the prior question. Is it better than expected take up as an option? And can you just talk about some of marketing efforts by the car companies that’s allowing for that take up to come in faster that you’ve expected maybe a little color around that would be helpful?

Jason Cohenour

Yes, sure. I’ll be frank. We don’t have very good visibility to take up and that is I would say a fairly guarded piece of information. But I will say and you’re right by the way regionally, the impact is mainly North America. And I would say the bigger driver, Todd, is expansion of models within one of our customers in particular. So we’re seeing this connective service that uses our module get deployed into more models of vehicles in this OEMs product line up.

Todd Coupland - CIBC World Markets

Has that step functioned happened or will you continue to see an expansion in the models over the course of the year?

Jason Cohenour

Well, we’re hopeful that we’ll continue to see some continued expansion in the number of models. And I do think in our most recent quarter and our guidance, you’re seeing some impact with model expansion.

Todd Coupland - CIBC World Markets

Okay. But should the takeaway be still unclear how much consumer take up there is given as an option?

Jason Cohenour

I would say, it’s a little unclear but I’ll hasten to say that anecdotally more customers are viewing this as a requirement and an important part of the purchase decision as opposed to some options that’s numbered 100 on the list, right, it’s much more visible to the end customer to the driver. And I’m glad to these are anecdotal comments, but much more visibility and I believe connected services are becoming a more important part of car selection and purchase process.

Todd Coupland - CIBC World Markets

Are you able to name the OEM?

Jason Cohenour

Well, I think, it’s pretty well known that in North America our two key revenue drivers in automotive are Toyota and Chrysler.

Operator

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

Richard Tse - Cormark Securities

Jason, just a broad question here on M&A. How should you or how should we think about you balancing acquisitions on the hardware side over making more an aggressive push something like building out AirVantage, and it kind of favoring one over the other because the most recent acquisitions are sort of kind of in the other bucket not the AirVantage bucket?

Jason Cohenour

I think, if you put price aside of course our strong preference would be by services companies as I would generally put and that could be more AirVantage services that could be some other kind of services that fit with our device to cloud strategy. So clearly that would be our preference, Richard. But of course there is a pricing consideration there as well, so those are factors we need to balance.

Richard Tse - Cormark Securities

That was my other question because I know they are obviously more expensive but in some respect they almost will help reiterating your stock higher too from that perspective.

Jason Cohenour

Yeah, I know I agree. This is a decision process we need to go through as we evaluate each of the targets that are roughly in the services bucket and there are some. We are not avoiding them because they are expensive, it’s not scaring us away. But I think also we need to be somewhat careful because we can’t just go and pay a huge telematics multiple as an example, I think that would be irresponsible, not good for shareholders. So, I think we have to take a considered approach recognize that’s our top priority to scale services, add more services and realize we are going to pay above our current multiple but we can’t pay an off market multiple. So, these are the levers and dials we need to tune as we meet these targets and grind through the funnel.

Richard Tse - Cormark Securities

All right. And just one last question with respect to design wins. Could you give us a maybe like a percentage change on the year-over-year basis and so where you stood as of December?

Jason Cohenour

No.

Richard Tse - Cormark Securities

All right. Worth a try.

Jason Cohenour

I think we will be on no mode.

Operator

Your next question comes from Daniel Kim. Your line is now open.

Daniel Kim - Paradigm Capital

Thank you. And just go back to the automotive theme, we have talked in the past about the design wins go into volume production in the back half of the year. You referenced the couple of new customers I believe in your prepared remarks. So, could you comment please Jason on where that design ramp, seasonally production ramp as of today, number of customers how that exact ramp will be rolling out in the back half and if there has been any additions to new customers that are ready to ramp in this back half as well? Thanks.

Jason Cohenour

I am probably not going to satisfy you with a precise answer on this Daniel but clearly we saw in Q4 and we expect in Q1 contribution from existing customers that are expanding models as I mentioned in a previous answer. And we would certainly hope and expect that that trend line will continue and we would expect that increased marketing effort on the part of some of our existing OEMs would have an impact in 2014 and perhaps also some new program contribution in 2014. I will say that the design wins we are competing for now those design wins probably won’t turn into revenue until 2016 or even ’17.

So, the contribution to ‘14 and in ‘15 are really going to be about the existing customers plus existing design wins that are in the customer program pipeline to be launched.

Daniel Kim - Paradigm Capital

Okay. May be I can ask it different way, based on cash design wins with the expected ramp into volume production in 2014. Has any of those timetables for ramp changed at all?

Jason Cohenour

Not to my knowledge, no.

Operator

There are no further questions at this time.

Jason Cohenour

Great. Candice, I think we can end the call. I want to thank everybody for joining today’s conference call and as usual should you have follow-up questions, management is available here in our Richmond office. And Candice, you can now wrap up the call and close the line.

Operator

This concludes today’s conference. You may now disconnect.

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