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Sierra Wireless, Inc. (NASDAQ:SWIR)

Q2 2014 Earnings Conference Call

July 31, 2014 5:30 PM ET

Executives

David Climie – Senior Director, Investor Relations

Jason W. Cohenour – Chief Executive Officer

David McLennan – Chief Financial Officer

Analysts

Scott Penner – TD Securities

Mike Walkley – Canaccord Genuity

Richard Tse – Cormark Securities Inc.

Paul Treiber - RBC Capital Markets

Operator

Good afternoon, ladies and gentlemen and welcome to the Sierra Wireless Second Quarter 2014 Earnings Conference Call and Webcast. My name is Lorrie and I’ll be your operator today. After today’s the presentation, we will conduct a question-and-answer session. (Operator Instructions) Please note that this call is being recorded today, Thursday, July 31, 2014 at 5:30 p.m. Eastern Time. At this time all lines are in listen-only mode.

I will now turn the call over to David Climie, Senior Director of Investor Relations at Sierra Wireless, please go ahead.

David Climie

Thanks, Lorrie, and good afternoon, everybody. Thank you for joining today's conference call and webcast. With me on the call today is Jason Cohenour, our President and CEO; and Dave McLennan, our Chief Financial Officer. As a reminder, today's presentation is being webcast and will be available on our website following the call.

Today's agenda will be as follows. Jason will provide a high level business review. Dave will provide a more detailed overview of our second quarter 2014 financial results, as well as our guidance for the third quarter of 2014. And then, Jason will provide a brief summary, following that we will finish with a Q&A.

Before we get started, I will 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 being displayed now.

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 third 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 and 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 our other regulatory filings. The presentation should also be viewed in conjunction with our press release and with the supplementary information on our website.

With that I’ll now turn the call over to Jason Cohenour for his comments and highlights on the second quarter.

Jason W. Cohenour

Thank you, David, and good afternoon, everyone. I’ll begin with some brief highlights on our second quarter of 2014. Revenue was strong in the second quarter at $135 million, representing growth of 23% over the same period in 2013. The $135 million in quarterly revenue represents another record for the company and was above the high end of our guidance range. Our year-over-year revenue growth was driven by a combination of contribution from recently acquired businesses and robust organic growth of nearly 17%.

Our revenue growth remains healthy, our profitability and operating leverage also continues to improve. In the second quarter our non-GAAP earnings from operations increased 149% year-over-year to $3.7 million. And non-GAAP EPS grew 167% to $0.08 from $0.03 a year ago.

I’m also very pleased to add that ABI Research, a key industry analysis firm for the third year in a row validated the strength of our leadership position in the Internet of Things. According to ABI, our share of the M2M embedded cellular module market remained stalwart 34% declaring us once again the clear market leader, a position we intend to leverage to drive continued growth and value creation.

Now let’s take a closer look at our two business segments. Our OEM Solutions business experienced strong revenue growth in the second quarter. Revenue increased 22.6% year-over-year to $116.6 million driven by growing sales of our 3G and 4G embedded modules. We experienced strong revenue contribution from key market segments during the quarter including automotive, mobile computing, energy, sales and payment and networking.

Gross margin in the quarter was 28.9% roughly flat sequentially and in line with our expectations as we continue to experience significant revenue contribution from large high volume customers.

Q2 was another quarter of robust design win activity as well. Our design wins were broad based coming from each region in several market segments including energy where we secured a key 4G design win with the leader in smart metering.

Automotive, we secured two important design wins including our first with the domestic Chinese car OEM; Insurance Telematics, a market experiencing significant growth and networking. I’ll add that activity around the connected car or what we call automotive continues to be very high. In addition to our continued design win success, we’re engaging on numerous large new opportunities and RFP responses.

We attribute our design win success to some key drivers including growth in overall market activity, our own targeted investments in adding sales capacity and the increasing strength of our overall product position. Our clear leadership position in 3G and 4G is proving very beneficial as the market continues to evolve away from 2G technologies.

In addition, our recently introduced HL line of essential products is capturing excellent market traction and has strengthened our position in important segments and geographies. We believe that flexible, scalable HL product line has enabled us to capture design win market share and will play an important role in our future revenue growth.

Of equal importance to our design win success has been our next generation smart module product line based on our new Legato embedded software platform. A combination of new high powered multi core hardware platforms together with our Legato embedded software platform is proving to be very attractive to both small developers and large OEMs. Both recognized that our smart platforms enabled them to accelerate time to revenue, lower program cost and risk and reduce overall solution cost.

Our new smart module Legato combination has already been instrumental in securing recent large design wins in key markets such as automotive. Additionally, the broader developer community is embracing Legato and AirVantage and leveraging these embedded and cloud software platforms to create new compelling IOT solutions. We are very encouraged by the early traction we see with our next-generation smart device to cloud solutions for OEMs and expect that our clearly differentiated position will help us drive long term growth and profitability.

Moving to our Enterprise Solutions business segment, revenue growth in the quarter was strong improving by 27% year-over-year to $18.4 million. Year-over-year growth in our Enterprise Solutions segment was driven by a solid contribution from the In Motion Technology's acquisition that we closed in Q1 of this year. Gross margin in this segment was 52.4% and in line with our expectations.

Deployments with public safety agencies and utilities in the U.S. were strong contributors to our Enterprise Solutions business in Q2. In these markets, 4G enabled In Motion mobile gateways and AirLink GX440s are very well positioned and helping us to secure new customer wins. We also saw continued expansion of rollouts with key device to cloud customers in Europe such as Expresso and Atlas Cut Go, who are actively growing their deployments of connected machines.

Our recently announced ES440 enterprise gateway has also been well received by the market and we expect it to bring meaningful revenue contribution later in 2014 and into next year. The ES440 is designed specifically for branch office and retail business continuity applications and also enables us to capture more of the solution value chain.

Overall, we see a growing opportunity for 4G enabled rugged gateways, a product space where we are particularly well positioned. As customers continue a secular transition to next generation technologies such as 4G, we expect our Enterprise Solutions business to be a direct beneficiary.

We are also making steady progress in building our AirVantage M2M cloud subscriber and customer base. Current customers continue to expand their AirVantage subscriber base during the quarter and we successfully secured new customers as well. AirVantage wins in the quarter included a large U.S. gas and electric utility and a large digital billboard operator also based in the U.S.

Finally, our integration of In Motion Technology is on track and going well. The In Motion products and team made a solid contribution in Q2 and we expect more of the same in the second half, while operating the business we are busy co-locating the In Motion and AirLink teams here on our Richmond headquarters and pursuing growth synergies leveraging our significantly expanded R&D and sales and marketing scale.

I will now turn the call back over to Dave who will provide more detail on the Q2 financial results and Q3 guidance.

David McLennan

Thank you, Jason and good afternoon everyone. 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.

Included in our Q2 GAAP operating expenses is an unusual item, the impact of which has been removed in our non-GAAP results. Specifically, the company decided to reduce the scope of its 2G chipset development activities resulting in restructuring cost of $1 million associated with staff reductions and an impairment of $3.8 million in related assets.

These amounts are reflected in our Q2 GAAP operating expenses. The staff reductions associated with this action will be fully implemented by the end of the third quarter of 2014 and the company expects an annualized reduction in operating expenses of approximately $1.2 million commencing in Q4.

Focusing on our non-GAAP results compared with our guidance for the quarter, total revenue in the second quarter was $135 million. This revenue includes the first full quarter of contribution from In Motion Technology which was acquired on March 1st. $135 million of revenue was above our $128 million to $131 million guidance range for the second quarter. Q2 gross margin was 32.2% up slightly from Q1 and reflects a stable mix of sales between our lower margin OEM segment and our higher margin enterprise segment.

Non-GAAP operating expenses in the quarter were $39.8 million, up sequentially from Q1 as expected. The sequential increase is due to a full quarter of operating expenses from In Motion as well as an increase in our bad debt provision related to an uncollectable receivable. Our non-GAAP earnings from operations were $3.7 million slightly above the high end of our guidance range and non-GAAP net earnings were $2.6 million or $0.08 per share which is at the high end of our guidance range.

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

I would also like to draw your attention to the additional segmented disclosure, which can be found on the last page of the press release. This provides segmented revenue and gross margin for each of our OEM and Enterprise segments for the three and six months ending June 30, 2014 compared to the same period in 2013.

Taking a more detailed look at Q2, total Q2 revenue of $135 million was up 23.2% year-over-year. Organic growth excluding contribution from the recently acquired In Motion and AnyDATA businesses was 16.8% compared to Q2, 2013. Revenue from OEM solutions was $116. 6 million representing 22.6% year-over-year growth.

During the quarter, we had solid contributions from energy, automotive, mobile computing, sales and payments and networking segments and continued to see a steady transition from 2G to more advanced 3G and 4G technologies.

Revenue from Enterprise Solutions was $18.4 million in total this was in line with expectation and up 27% year-over-year. This revenue includes a full quarter from In Motion. During the quarter, In Motion performed well and was a little ahead of our expectations. While revenue from our AirLink products was slightly below our expectations.

During the quarter profitability also improved. Second quarter EBITDA increased to $6.8 million up from $4.9 million in the same quarter last year and earnings from operations grew to $3.7 million in Q2 compared to $1.5 million a year ago. Good top line growth combined with solid gross margin and balanced OpEx management as we invest for growth and integrate new businesses is delivering business model leverage and result in improvements and profitability.

We continue to strengthen our balance sheet. During Q2, we added $17.1 million to our cash balance and in the quarter with $168.4 million in no debt. Cash flow from operations during the second quarter was a healthy $11.7 million driven by earnings growth and improved working capital metrics. We utilized $2.8 million of cash during Q2 for capital expenditures mainly related to the purchase of development tools and factory test equipment.

Also during the quarter, we received the full $13.8 million balance of the AirCard proceeds which have been held in escrow. We used some of these proceeds to purchase $6 million of shares for our restricted share unit trust. Upon investing in the future, these shares will be distributed to eligible employees as part of the company's long-term incentive compensation program. Our $168.4 million cash balance purchased in a strong financial position to execute on our organic growth plans and pursue our M&A strategy.

Moving onto guidance for the third quarter of 2014, which is provided on a non-GAAP basis. During Q3, we expect to realize continued solid revenue growth with revenue in the range of $137 million to $140 million. This represents 23% year-over-year growth at the midpoint of our range and we expect organic growth to be similar to what we experienced in Q2. In Q3, we are expecting a sequential improvement in gross margin driven primarily by reductions and cost of goods.

Operating expense in the third quarter are expected to be similar to the $39.8 million reported in Q2. We expect G&A to decline in Q3 relative to Q2 and we expect R&D OpEx to increase relative to Q2 as a result of increased product certification cost in the quarter. Based on these expectations this results in non-GAAP consolidated earnings from operations of between $4.9 million and $6.2 million, at the midpoint this would represent a 131% increase compared to earnings from operations in the same quarter last year. And net earnings of between $3.8 million to $4.7 million or earnings per share of approximately $0.12 to $0.15. At the midpoint, this would represent a 50% increase compared to the normalized EPS of $0.09 in the third quarter last year.

We expect our tax rate in Q3 to be approximately 26% of non-GAAP earnings down from the 34% in the second quarter.

With that I will now turn the call over to Jason, who will provide a summary.

Jason W. Cohenour

Thank you, Dave. So to summarize, our Q2 results were strong. We delivered record quarterly revenue and strong year-over-year growth. Our revenue performance drove significant growth and year-over-year profitability metrics as well highlighting our improving business model leverage.

ABI Research once again validated the strength of our market leadership position in the Internet of Things, a market that offers compelling growth and value creation opportunities.

We are successfully leveraging the strength of our position to capture a significant share of this great opportunity. OEM designs wins continue to be robust. And new products like our HL series and Legato enabled smart modules are receiving great traction in the market and already contributing to our success.

We also continue to make progress in expanding our position in the value chain adding new capabilities to our AirVantage cloud offering while also adding new customers and subscribers. I believe our progress offers validation that our strategy and product offering is sound, it gives us confidence that we will achieve our growth and profitability aspirations in 2014 and beyond.

We also drove solid cash generation in Q2 further strengthening our balance sheet. We remain focused on putting our balance sheet to work in acquiring M2M companies that will 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.

In Q2, both In Motion and AnyDATA made significant contributions to our strong results. And since 2008, we have grown our M2M business organically and through acquisition from $158 million to LTM revenue of $487 million. We have done this while improving our business model and defensibility. Our aim is to extend this track record of creating value through a combination of organic growth and acquisitions and to deliver a great return for our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Scott Penner of TD Securities, your line is open.

Scott Penner – TD Securities

Thanks. Just Jason, when we see result like this, it's reasonably materially higher than the guidance, is this just higher activity, higher adoption of some of your end market products by customers or is there any new starts perhaps of any design wins that were expected later in the year?

Jason W. Cohenour

Well, first of all, I’d say we have a highly fragmented business Scott, so there is lots of moving pieces in any given quarter. So, it's hard to point to any one of those things and say, this is what’s driving our – call it over performance against expectations. So, I would say, I would look at it and say that it's sort of broad based. Europe does continue to be a little bit of a drag, so from a geographical standpoint, we are not really benefiting from a revenue standpoint yet there with respect to our recovery. So, I would say broad based across a lot of segments and in particular, in the U.S. and in Asia that’s driving our over performance against expectations right now.

Scott Penner – TD Securities

Any notable increase in, I guess, you would say the attach rate of the AirVantage services with some of your OEM design wins, given some of the investments in education and the sales force earlier in the year?

Jason W. Cohenour

I would say we are more, I would say we are earlier in the phase there. We have had success from large OEMs and I would say that we have good forward indicators with respect to the growth and the funnel of opportunities. And the job on those now is to pull them through the funnel and close them. So, while we have had some interesting large OEM design wins success I would say I am much more encouraged about the funnel of opportunities than the actual number of deals we closed.

And then, on the Enterprise side, I would say for the metrics, what we would call our hit rate metrics that we track internally, we don't externally disclose these, we see a definitive step up with respect to hit rate. So whenever a new AirLink box is sold, and soon whenever a new In Motion onboard mobile gateway is sold, our hit rate for attaching services to that is definitely moving in the right direction, moving up.

Scott Penner – TD Securities

Good to hear. Just on the Legato too, was this the first quarter now that I hear you say you’ve secured design wins and is this the first quarter where you really say that on Legato?

Jason W. Cohenour

It’s the first quarter I believe we were able to say that and just being transparent we had even by the end of Q1, we had obviously as you would have expected, very good indication that we would get one and now we have got at least two or three large OEMs who have embraced Legato and are designing their solutions based on that platform.

Scott Penner – TD Securities

And just one last one David, and that is the $1.2 million savings to come from the 2G wind down, is that I mean, do you expect or should we expect that's the kind of thing that will be rolled back into operations in Q4?

David McLennan

Yes, I mean there is lots of moving pieces there Scott, but that reflects a reduction of staff in both engineering and G&A. And so, yes, those costs will come out in Q4 and there will be other moving pieces around that but those costs will come out beginning in Q4.

Scott Penner – TD Securities

Okay, I appreciate it, thank you.

Jason W. Cohenour

You’re welcome.

Operator

Your next question comes from the line of Mike Walkley of Canaccord Genuity. Your line is open.

Mike Walkley – Canaccord Genuity

Great, thank you. Congratulations on the strong results in execution and integration already. Jason, you just discussed maybe a longer term business model with the OEM solutions growing so strong and it sounds like you have a good design activity, to hit longer term maybe 35% gross margins target, is that still possible given the strong growth in OEM Solutions business or do you need to make some acquisitions to help the Enterprise Solution grow faster in that mix?

Jason W. Cohenour

Well, I certainly think it's possible and as Dave indicated, I think that we expect to see improvement in gross margin in the third quarter and you are right, I mean, if the mix of our business stays heavily weighted to the OEM side, it's going to be harder for us to get that but nonetheless we are committed even on an organic basis to get there. And our levers and dials are driving higher growth from Enterprise Solutions and making sure that not only within our Enterprise Solutions customer base, but also on our OEM customer base, we get higher attach rates with respect to connecting AirVantage services to those sales.

So, it would be harder without further acquisitions and as you know we have said repeatedly in the past that we are committed to scaling Enterprise Solution not just organically, but through acquisitions. But, my view is, we have got the levers and dials and pieces in the house now to get there long term as well.

Mike Walkley – Canaccord Genuity

Alright, thanks. And just following up it with, you mentioned ABI report and then you also talked about you gained, you think design share activity, so just putting those together do you think that you are back half of the year and going maybe in 2015 that you should stay at the high end of the range for industry growth and maybe even above industry growth for the next two years and if so, is it maybe Legato and some auto customers or what verticals have given you kind of that design win share of growth comments?

David McLennan

So, while there is a few different questions, I think maybe I will just address the growth question and I am going to put brackets around this kind of the short term. Our short term growth view and we said this on our last call, we have been talking a lot about 10% to 15% organic growth, year-over-year organic growth, first half is as you are seeing we are running a little bit above that range and our Q3 guidance implies that we will certainly be at the high end range maybe a little bit above. So, I think, short term we continue to be comfortable in short term I would say, within 2014 kind of comfortable at the high end of that range. And then, as we head into 2015, I want to be careful not to over commit candidly.

So as we look at 2015, we are going to stick to the 10% to 15%, you see how we are performing in 2014 and certainly we would hope that we can carry that growth rate into 2015 as well, but it's still too early to comment on that at this point in time. Now, with respect to new design wins, design wins are the stuff of future revenue and a lot of the design wins we’re earning now Mike, don't turn into revenue until 2016 even 2017. So, I think particularly in automotive, so automotive has indeed been a theme, we have secured some I would say automotive design wins of scale and we are competing for more and those design wins are really the stuff of 2017, 2018 revenue growth. The design wins on HL product series can be, I would say, shorter term, maybe 2015 impact but this is really kind of loading the funnel for the future revenue; the new products are really loading the funnel for future revenue.

Mike Walkley – Canaccord Genuity

Okay great, thanks. And I just one question from me and I will pass it on, just t clarify the other comments on the 1.2 million OpEx coming out, I know there is lot of moving parts but are you still hiring sales people to drive growth or is that behind so we should expect may be a down sequential December quarter for OpEx and then can you just help us with the tax rate for the second half of the year?

Jason W. Cohenour

Sure, so yes Mike we continue to make selected investments in the channel so that’s ongoing and you are going the other way, you see us tweaking our business otherwise to can we fund those investments so you will see, you know you expect some cost to come over as a result of that but there will be some things going the other way in Q4 as well. So it feels like where we are right now is not a bad place in terms of a range. With respect to the tax for the second half, our assumption in Q3 and it would be similar in Q4 would be approximately 26% non-GAAP pre-tax earnings.

Mike Walkley – Canaccord Genuity

Alright, thank you.

Operator

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

Richard Tse – Cormark Securities Inc.

Thank you. Just a follow up on Mark’s question if you sort of look at the OpEx base, how much more revenue didn’t get support of that sort of current rate here before you have to actually kind of move on to spending more?

Jason W. Cohenour

Yes I don’t want to get ever hurt guidance but Richard you are clearly, we think there is decent leverage in the model you know you have heard us focus on you are managing our OpEx in a tight range here, so I think there is a pretty good headroom above current rates without having to dramatically increase the OpEx about where we are and I am hesitant to put a dollar figure on that though

Richard Tse – Cormark Securities Inc.

Yes, okay.

Jason W. Cohenour

But the leverage you know I guess going the other way. You have seen the leverage in the model, it is working, we are growing the top line without having to grow OpEx in the same relative way. So there is decent leverage there.

Richard Tse – Cormark Securities Inc.

Okay and just a broader question in the case and if you look at the applications that are in the market today, a smart meter of course, what is if the applications that are coming on the horizon you are seeing in your base of prospective customers?

Jason W. Cohenour

As you know the (inaudible) things is positively mesmerizing in terms of segments and applications but I would point to a few potentially interesting trends that we are seeing now. One is that municipal lighting and that’s under the umbrella of the smart cities and we had a very interesting design win with Philips as you know we have talked a bit about that on the last conference call and I think that could be a very interesting secular opportunity and I would say that connected machines will come closer and closer to the individual over the time, you know we have even in our current business you see things like an Expresso and I think that as solutions get easier to build and deploy and as service pricing you know becomes more competitive and more tailored to certain applications, you know everything open up. I think write down to things like variables so I think in general we have got a lot of runway in the enterprise, not just in the segments we have talked about today but in things like smart cities and things like smart grid and when say that’s beyond smart metering that’s goes deeper into the grid. That’s kind of real time business today that has good secular opportunity and as we look through the enterprise, you know I think that applications get much closer to the individual. Like I said write down to things like variables.

Richard Tse – Cormark Securities Inc.

Would you guys have questions on the variable sites right now or is there something you are looking and getting into?

Jason W. Cohenour

Well, we are horizontal solution provider so I would say we were unlikely to make a smart watch, now having said that do we have devices inside personal tracking devices, some of which worn as watches, yes we do that today and I think you know as technology gets more miniaturized and sexier I think that opens some interesting potential opportunities.

More comments was really more abstract than you know we have got four design wins. And I will say that public safety is an interesting thing, we have been playing public safety today but LTE is we believe is going to become a potentially de facto standard in Europe, believe it or not for an emergency services kind of activity and I think most of you on the line have heard about the activities around band 14 and FirstNet in the U.S. eventually that will happen and I think that open ups another very interesting secular growth opportunity for us.

Richard Tse – Cormark Securities Inc.

Okay and then just one last question, obviously MA is a big part of your plan here going forward, can you may be sort of comment on what the environment there for right now and may be some color around, some of the possibilities that you are looking at without naming names like areas of interest?

Jason W. Cohenour

Well, probably I am going to sound just like repeating what I have said in the past but I will say that we were busy, we were very busy and we have got an active funnel of M&A opportunities we have a lot of management meetings, we as you would expect, some conversations more advanced than others and we are focused on primarily on adding scale and capability to our enterprise solutions business unit. So that brings us into targets like in motion as an example, so high margin differentiated terminals and gateways that attack certain targeted segments and services and services is a pretty important part of our – device to cloud vision and we are spending a lot of time there and services for us range from you know kind of straight (inaudible) services as an extension of our AirVantage cloud services and right into vertical applications and we were looking at targets in both those areas.

Richard Tse – Cormark Securities Inc.

That’s great. Thanks Jason.

Jason W. Cohenour

Sure.

Operator

Again, [Operator Instructions] your next question comes from the line of Paul Treiber of RBC Capital Markets. Your line is open.

Paul Treiber - RBC Capital Markets

Well thanks very much. I just wanted a follow up on your comment about the smart mirroring and variables and its only a comment that came out at your -- I think it was an investor and it was Analyst Day in Paris about a month ago on LTM and could you just elaborate on your work on LTM and then how you see LTEM increasing the addressable market for license of wireless may be some unlicensed wireless like Wi-Fi.

Jason W. Cohenour

Yes they will. So we are doing I would lots of early work with LTEM or we are very deeply engaged with the standards body working on the LTEM standard, we are I would say a meaningful contributor to the standard and we are forming our own vision around LTEM and that includes and the end markets. It’s going to be a long term effort, Paul so we look at LTEM for assets 2017/2018 event probably. With respect to commercially available products and networks to support them but we think very-very important and the promise of LTEM is ultra-low energy, so enabling devices that can stay on our network for five years running on a double A battery as an example, right. That’s a big breakthrough for license cellular and much wider area of coverage as well. So lower power, simpler devices as well so simpler devices equals less expensive devices and much wider area coverage which equals, I would say a real competitive threat to establish local area technology such as Wi-Fi. So LTEM for us, vitally important because we think it opens up the opportunity to really take market share for IOT market share from the traditionally local area, wireless technologies.

Paul Treiber - RBC Capital Markets

That’s good to understand. The business model again addition to opening up the addressable market for everyone in the MT to M space, is there also that the royalty revenue potential because you are contributor to the standard.

Jason W. Cohenour

I wouldn’t get you far ahead of us on that I mean I think it’s certainly if in fact we are successful having a significant contribution and when the standard is established we own some essential intellectual property, I mean certain that’s our goal by the way but we, we don’t have a business model today or even a planned to think about a business model today where we go offensive on intellectual property but it certainly gives us I wouldn’t say flexibility and protection.

Paul Treiber - RBC Capital Markets

Okay and then just a little bit still closer to reality at this point, your design wins giving you visibility in 2018, should we take that as the competitive environment in the technology landscape, what these OEMs are looking at, is pretty much existing environment and it’s probably not going to be distributive change in the next two, three or four years whatever it may be.

Jason W. Cohenour

I think that’s accurate based on the design wins we are competing for now. We rather making decisions on technology that’s very clearly visible, you know even at the product may not be commercially available today, the product that is clearly visibly on a roadmap and deliverable in the coming year or so and as those products that are getting designed into long term solutions and when I say 2018 I mean on the part—speaking about automotive 2018 that start of production, so from 2018 then you have a whole lifecycle of the solution within a vehicle. These are pretty long term things I would say particularly in automotive. Now with respect to disruption, I wouldn’t consider this disruption I would consider with another step along the LTE chain, we’re already talking to a number of OEMs about LTE advanced as you might expect, carrier aggregation and certain segments that were engaged and that were very interested in those new higher speed services and of course the carriers are very interested as well because it gives them spectrum flexibility.

Paul Treiber - RBC Capital Markets

Okay thanks for taking my questions, I’ll pass the line.

Jason W. Cohenour

Sure.

Operator

You have no further questions at this time, I will now turn the call back over to you.

David Climie

That’s great. Well I want to thank everybody for participating in today’s call and as usual the management is available here at our Richmond headquarter should you have any follow up questions. Laurie, we can conclude the call.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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