Sierra Wireless' (SWIR) CEO Jason Cohenour on Q2 2016 Results - Earnings Call Transcript

| About: Sierra Wireless, (SWIR)

Sierra Wireless, Inc. (NASDAQ:SWIR)

Q2 2016 Earnings Conference Call

August 4, 2016 17:30 ET

Executives

David Climie - Vice President, Investor Relations

Jason Cohenour - Chief Executive Officer

David McLennan - Chief Financial Officer

Analysts

Thanos Moschopoulos - BMO Capital Markets

Mike Walkley - Canaccord Genuity

Paul Treiber - RBC Capital Market

Todd Coupland - CIBC

Paul Striep - Scosche Capital

Mike Latimore - Northland Capital

Operator

Good afternoon. My name is Kelly and I will be your conference operator today. At this time I would like to welcome everyone to the Sierra Wireless Second Quarter 2016 Earnings Results Conference Call. All participants are in a listen only mode. After the speakers remarks there will be a question and answer session. [Operator Instructions].

Thank you and I will now turn the call over to David Kwame Vice President of Investor Relations. Please begin Sir,

David Climie

Thanks Kelly. 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 David 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 review of our second quarter results, Dave will then provide a more detailed overview of our financial results as well as our guidance for the third quarter of 2016 and following the Jason will provide a brief summary, and then will finish with a Q&A session. Before we get started I will reference the company's Safe Harbor statement. The summary of our Safe Harbor statement can be found on the page two of our webcast and is now being displayed.

Today's presentation contains certain statements information that are not based on historical facts and constitute forward looking statements. These statements include our financial guidance 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 attention to a longer discussion of risk factors in our annual information form and management discussion analysis which can be found on SEDAR and EDGAR, as well as our other regulatory filings. This presentation should also be viewed in conjunction with our press release.

With that I will now turn the call over to Jason Cohenour now for his comments.

Jason Cohenour

Thank you David. And good afternoon everyone. I'll start with a summary of our second quarter 2016 results. Revenue in the second quarter was $156.2 million up 9.4% sequentially. Compared to the same quarter last year revenue was lower 1.1%. On a year over year basis lightly softer OEM sales were largely offset by growth in both enterprise and cloud and connectivity. Our Q2 revenue was in line with our expectations and slightly above the midpoint of our quarterly guidance.

Adjusted EBITDA in the second quarter was $12.1 million and non-GAAP earnings per share were $0.20. Our Q2 profitability metrics benefited from a recovery of legal expenses in the quarter excluding this favorable impact our Q2 non-GAAP EPS was $0.14 which is slightly ahead of the midpoint of our guidance. Customer acquisition activity was solid during the quarter as each of our business units won new programs and customers across a broad range of market segments in geographical regions.

I'm also pleased to announce that we closed the acquisition of GenX mobile yesterday significantly strengthening our strategic position in the important fleet management and asset tracking segments and I'll provide more detail on this acquisition a little later in the call. But now we're going to move and take a closer look at the business segments. Starting with OEM revenue in our O.E.M solutions business was $132.6 million in the second quarter compared to $138.2 million in the same quarter of 2015.

As expected OEM revenue was up 10% sequentially as we saw stronger demand from established customers and programs as well as growing contribution from new programs. Market Segment drivers of the sequential growth included automotive, sales & payment, energy and mobile computing. OEM non-GAAP gross margin was 31% in Q2 up from 28.4% in Q1. Q2 OEM gross margin was favorably impacted by one time legal, Recovery of legal costs and net of this favorable impact non-GAAP gross margin in the OEM solutions business was 29.7%.

During Q2 we experienced solid design win success including two new wins in the growing China OEM market as well as key wins in the transportation, smart metering, networking and industrial segments. Our pipeline of new customer programs continues to expand supporting our expectation of long term growth OEM solutions. In the short term. However our view of growth in OEM solutions has become more cautious as our demand outlook for established customers and programs has weakened.

And we see signs of customers managing inventory more tightly as we go out look for established customers and programs is partially offset by expected continued growth from new programs. Moving to Enterprise Solutions. Revenue in our enterprise solutions business was $16.6 million in the second quarter. An increase of 10% compared to the same quarter last year. For the first half of 2016 Enterprise Solutions is up approximately 9.5% as this line of business continues to show healthy signs of a return to growth.

Enterprise gross margin in Q2 was 53.9% excluding the favorable legal cost recovery referred to earlier enterprise gross margin was 52.8% which is in line with what we saw in Q1. In addition to targeted investments and sales an indirect channels the launch of new market leading products is critical to driving continued growth in this line of business. And the second quarter the recently launched RB50 Industrial Gateway was a key contributor to revenue growth.

During Q2 We also launched our next new product the MP70 rugged mobile router that delivers high speed LTE advanced connectivity as well as gigabit WiFi and gigabit Ethernet for mission critical applications in the public safety transit and field services markets. We're very excited about this new product and early market traction has been strong.

The launch of additional new enterprise products is expected in the second half of 2016. New customer acquisition activity was also strong in Q2 with significant wins in the public safety and transit segments. And we're also adding some scale and key capabilities to this line of business with the acquisition of GenX Mobile. So a bit more detail on the GenX acquisition. GenX immobile as an established provider of in vehicle cellular devices for the fleet management, asset tracking and transportation markets. It is based in San Jose. GenX devices are generally deployed in location aware and or driver behavior aware applications principally in the U.S. and Canada.

The company's products are complementary to our existing enterprise solutions product line and occupy the lower end of the mobile device range. GenX devices support 2G and 3G cellular technologies and the company has 4G products on the roadmap. We see GenX. as an excellent strategic fit for our Enterprise BU as it strengthens our position in the important fleet management and as a tracking markets and bolsters our telematics and location capabilities. The combined mobile product portfolio will represent the broadest in the industry enabling us to address the needs of nearly any fleet type.

We also see a natural bundling opportunity for GenX devices with our cloud and connectivity services. Furthermore we believe that overtime there are opportunities to capture significant cost of goods and channel synergies. The acquisition of GenX. was completed yesterday for $7.8 million in cash or $6 million net cash acquired. The company has 22 employees all of whom have joined our enterprise business unit team. In the first half of 2016 first half GenX recorded revenue of $6.7 million dollars and was roughly break even on a non-GAAP earnings from operations basis.

Now moving to our cloud and connectivity services segment. But in connectivity revenue which is comprised mainly of recurring service based contracts was $7 million dollars in Q2 with non-GAAP gross margin of 40.7%. New customer acquisition activity was strong in Q2 as we secure new programs in the automotive, industrial security and digital signage segments. We are also very encouraged to see that approximately 50% of the new customer wins were the result of the inter BU lead sharing and collaboration.

This supports are key strategic thesis that device sales can lead directly to cloud and connectivity wins and that combining CR devices with CR cloud and connectivity services results in a differentiated device to cloud solution. We are also very encouraged to see that the vast majority of new cloud and conduct of any customers are adopting our patented smart Sim technology that we launched last quarter. Our smart Sim technology enables us to deliver the highest quality of connectivity service of available while also closely managing our cost of service.

Additionally our core network platform is now fully upgraded to support LTE services and we're continuing to expand our wholesale agreements with mobile network operators as we seek to expand our connectivity services globally. Demonstrated lead flow from existing and new device customers, differentiated cloud and connectivity capabilities and global footprint expansion give us confidence in our ability to drive strong long term growth in our recurring cloud and connectivity services revenue.

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

David McLennan

Thanks Jason. And good afternoon everyone. Please note that we report our financial results on a US GAAP basis. However we also present our non-GAAP results in order to provide a better understanding of our operating performance. As a reminder our definition of non-GAAP and a full reconciliation between our GAAP and non-GAAP results is provided in the press release for your reference. Moving on to some summary key metrics for Q2.

Q2 2016 was slightly better than expectations revenue was $156.2 million. Adjusted EBITDA was $12.1 million. Non-GAAP earnings from operations were $8.4 million and non-GAAP net earnings were $6.4 million or $0.20 a share. Note that in Q2 2016 we received reimbursement of certain legal costs pursuant to a favorable arbitration decision on a contract dispute with an intellectual property licensor.

The reimbursement resulted in a favorable impact of $1.9 million in cost of goods sold. $1.7 million of this was booked in our OEM business unit and $200,000 was booked on our enterprise business unit. Comparing our Q2 non-GAAP results to guidance. Revenue of $156.2 million was slightly above the midpoint of our guidance range of $150 million to $160 million. With each business segment performing largely as expected. Q2 gross margin of 33.8% included the previously mentioned legal cost recovery of $1.9 million.

Net of this recovery in Q2 and that of the separate legal settlement reporting Q1 gross margin increased sequentially by 1.1 percentage points to 32.6% in Q2. Q2 non-GAAP operating expenses were $44 million, $44.4 million in line with their expectations and up $1.1 million compared to Q1. The sequential increase relates to the favorable legal settlement we booked in Q1 which reduced our OpEx in that quarter by $400,000. The remainder of the sequential increase in Q2 OpEx relates to sales and market investments as well as costs associated with office consolidation in France.

This operating performance resulted in non-GAAP earnings per share of $0.20 in Q2. Net of the previously mentioned legal cost recovery non-GAAP EPS was $0.14 which was slightly above the midpoint of our guidance. Key metrics for the second quarter compared to the same period in 2015 and for the first quarter of this year; on a year-over-year basis, total revenue decline by 1.1%. This decline was driven by a 4% decrease in OEM revenue reflecting some demand softness from certain established OEM customers and programs, partially offset by contribution from new programs.

Please also know that we experienced a particularly strong quarter in Q2 a year ago making Q2 a tough year-over-year comparable. Partially offsetting the OEM decline were stronger revenues from both Enterprise Solutions which was up 10% year-over-year in cloud and connectivity services. Cloud and connectivity services had a significant left year-over-year from acquired businesses. On a sequential basis compared to Q1 total revenue improved by 9.4%. This increase was driven primarily by a 9.8% increase in OEM revenue with notable increases in automotive, energy, payment and mobile computing.

Enterprise Solutions was also up sequentially by 10.6% as new products continue to ramp. Similar to the revenue profile Q2 adjusted EBITDA and non-GAAP earnings from operations were both down year-over-year and up sequentially from Q1. Adjusted EBITDA increase sequentially to $12.1 million in Q2 of 2016 compared to $6.7 million in Q1. Net of the previously mentioned legal cost recovery in Q2 and the separate legal settlement in Q1 EBITDA was $10.2 million in Q2 compared to $4.4 million in Q1.

Non-GAAP operating income increase sequentially to $8.4 million in Q2 compared to three point six million in Q1. Net of the previously mentioned legal cost recovery in Q2 and the separate legal settlements in Q1 knowing gap operating income was $6.5 million in Q2 compared to $1.3 million in Q1.

Looking at our balance sheet our balance sheet remains strong and we have no debt. During the second quarter the business generated a very healthy $16.5 million in cash from operations. CapEx was fairly high at $5.7 million during the quarter which included investment a new factory, test equipment, R&D and I.T. equipment, software licenses and some office leasehold improvements. Precash flow net of CapEx was $10.8 million. Other activities generated net of $1.5 million cash in the quarter and in total our cash balance increased by $12.3 million to end the quarter at $98.4 million.

Moving on to guidance or short term outlook for the businesses cautious while we expect to see continued solid revenue contributions from new what we end programs we are seeing signs of softer short term demand and tighter inventory management with some established OEM customers and programs. Accordingly for the third quarter of 2016 we expect revenue to be in the range of $145 million to $155 million and knowing gap earnings per share to be in the range of $0.09 to $0.13. In the fourth quarter of 2016 we expect to see both sequential and year-over-year growth, although not to the levels previously anticipated.

Given the softer short term outlook we now expect full year 2016 revenue and non-GAAP EPS to be below the low end of our previously stated annual guidance range of $630 million to $670 million in revenue and non-GAAP EPS of $0.60 to $0.90. And this guidance, non-GAAP guidance excludes any contribution from the recently acquired GenX. mobile business.

With that I would like to turn the call back to Jason.

Jason Cohenour

Thank you, Dave. So to summarize we delivered a solid second quarter of 2016 with results that were slightly better than we expected. Our customer acquisition activity was once again strong across all business units in geographical regions and wins came from multiple market segments. In addition we saw an excellent continued collaboration across our business units resulting in a significant expansion of our cloud and connectivity customer base. After delivering another quarter of year-over-year growth or Enterprise Business as added scale, expanded their product line and established a stronger strategic position in the important fleet management market with the acquisition of GenX mobile.

Looking forward, as Dave said, our short-term outlook for the business is cautious. And we expect to see continued revenue growth from new OEM programs and Enterprise Solutions and a continued expansion of our cloud and connectivity customer base. We are seeing signs of softer short term demand and tighter inventory management with some of our established OEM customers and programs. This is led us to lower our revenue and earnings expectations for the second half of this year. Longer term we continue to be excited about the growth opportunity ahead.

With a global leader in cellular connectivity solutions for the Internet of Things and we've made significant progress and further strengthening our strategic position. Rapidly expanding our position in the value chain, firmly establishing ourselves as a differentiated provider of device to cloud solutions and investing in new product innovation and sales capacity. Our three business segments now expose us to a much larger and more valuable market opportunity. In the aggregate industry analysts predict that our three segments will represent a $20 billion market in 2020. And we believe that we are better position now than ever before to capture a significant share of this opportunity.

We also plan to stay active in M&A that supports our device to cloud strategy and that helps us to accelerate long term growth and value creation for shareholders. And that concludes our prepared remarks and Kelly you can now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Thanos Moschopoulos of BMO Capital Markets. Your line is open.

Thanos Moschopoulos

Hi, good afternoon. Jason can you provide any color in terms of the OEM weakness that you're seeing are there any seams the are as far as end markets or geographies Or would you characterize it as somewhat broad based across a number of areas?

Jason Cohenour

Well I characterize it this way Thanos that it is a short list of customers. However these customers represent a number of different segments from a geographical standpoint by the way these are established customers so these are customers and programs that that were in existence last year the way to think about that and from a geographical standpoint it is these customers of the driver of the revenue for these customers is largely the U.S., Europe and a little bit of Brazil. So I wish I could share with you one theme there Thanos else there isn't. I guess there is a shortlist of established customers and programs across a few different rate regions and segments.

Thanos Moschopoulos

And then in terms of the 4D programs that you previously talked about ramping in the second half are those on track and have your expectations changed at all in terms of the revenue you might see from those programs?

Jason Cohenour

They are on track in fact they've been contributing in the first half. They contributed a little bit in Q1 and to our expectations the same thing happened in Q2 and so our expectation is that's going to continue Thanos also I mean there's 40 programs so as you can imagine there's always pluses and minuses. But it's I would say it's you know as well Distributed across geographies and segments and so far those new programs are contributing in line with our expectations. And we expect that to continue through the through the balance of the year.

Thanos Moschopoulos

And maybe one for Dave. How should we think about OEM margins then your term given the revenue pressure?

David McLennan

I mean Thanos, this is Dave here. We saw a nice little tick up sequentially from Q1 to Q2. I would extend this is just very OEM I why would I would think we would see stability in that in that area off of the Q2 number.

Thanos Moschopoulos

Okay. And maybe one last one for me. You mentioned some of the bookings may have been good in the quarter. Can you provide more color in terms of how booking shaped up?

Jason Cohenour

Drove bookings up bookings were five and what I really refer to were customer wins so that's a, you know sometimes a customer win is a design win that doesn't necessarily immediately come with purchase orders Thanos especially in the OEM business right so those are design wins generally and enterprise, you know that that is anchored by a PO and new customer acquisition activity was good In the second quarter and you've seen now a couple of good quarters a year-over-year growth out of Enterprise so that, we're not we're bullish that that business is back to a you know sustained year-over-year growth. And customer acquisition in cloud and connectivity is generally anchored by a services contract and of course overtime The subscribers related to those customers and contracts roll out and I would characterize the new customer acquisition activity in that business as quite strong.

Thanos Moschopoulos

Great, thanks guys.

Operator

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

Mike Walkley

Great. Thank you. Dave just a clarification on the last question when you talked about gross margin stability, is that X the one time legal recovery or consistent with legal and then on the enterprise solutions with GenX can you help us think maybe about gross margin trends once that closes since it sounds like it's a lower gross margin product in that overall Group of products there.

David McLennan

Thank you. Mike its Dave. My comment was excluding the illegal recovery in Q2 and the legal settlement in Q1. So you know the 29.7% as an example and OEM gross margin Q2, that's what I was referring to as stability going forward. With respect to GenX and the gross margin profile there you know look at the smaller business. It will be below the average of gross margin in our enterprise business.

Mike Walkley

Okay. Thank you. And my follow up question for Jason just on the cautious OEM solutions outlook, as you look at that list of customers is there any second sourcing going on there. Maybe they're switching programs to diversify or is there anything any color you can give us that maybe feel good about these customers longer term and what gives you confidence maybe for that recovery in Q4 on your visibility? Thank you.

Jason Cohenour

Sure thanks Mike. So yeah I think the theme here is weaker demand as opposed to share shift. Mike this is the way to think about it. I mean you know in our business as you can appreciate we always have some share gains and always have a little bit of share loss in any quarter so that is I would say playing out as expected and with respect to the second half weakness we're seeing from these customers the theme is not share shift, the theme is really about tighter management of inventory and in softer demand from our customers customer's.

Mike Walkley

Okay. Thank you

Operator

Your next question comes from James Kisner of Jefferies. Your line is open.

Unidentified Analyst

Hi Jason, this is a Timor [ph] speaking for James today. We have a couple questions. So regarding your existing OEM accounts versus being new accounts I don't know if you could help us judge the relative size. I'm assuming that new accounts are relatively small so their growth I mean when will it offset the decline in the existing accounts. If you could give us any information about that, that'll be great.

Jason Cohenour

Sure. So I'll give you some a directional commentary on that Tim and as you can appreciate the that the headwinds we're seeing from a small list of existing customers and programs they tend to be larger customers as you can appreciate and in the new programs, Well there's 40 of them some of them are small and some of them are quite large. These are not all new customers by the way there are new programs so some of them are existing customers rolling out, they're rolling out new programs. With respect to you know when the new program revenue contribution fully offset the weakness from existing customers and programs you know directionally what we've what we've shared here is as far as we're going to go and that is we expect Q4 to be up sequentially from Q3 and to be up year-over-year. So of course you know that year-over-year comparison is not a tough one given the given the given Q4 2015 but up sequentially is the key takeaway there.

So definitely we expect some growing strength if you will with respect to the contribution from the new programs like I said we've seen that in the first half. And that we've got good visibility to that in Q3 and we expect more of that in in Q4.

Unidentified Analyst

Okay. And then a follow up question about the OEMs so for the PC market OEMs, in Q2 PC market actually did better than expected. And so you're, is one of those customers in the DC area, are you seeing lower demand there?

Jason Cohenour

So in Q2 revenue from PC OEMs in Q2 was as expected, is the way I would characterize it. So yes up from Q1 but as expected in Q2. So didn't outperform our expectations, that's maybe a clarification there. As we look forward short term here Q3, Q4. With respect to the existing customers and programs and the demand we see there. You know unfortunately there's representation from a number of segments Tim so it's not there's not a PC OEM team. There are there are names on that list from networking, automotive, energy and mobile computing.

Unidentified Analyst

Okay. And then one last question for David then. About OpEx in general do you expect you know OpEx to be flattish quarter-over-quarter for Q3.

David McLennan

Tim I think we'll see in Q3 I think we'll see it tick up a little bit off of the 44.4 that we saw in Q2 and that's going to be largely driven I expect by some R&D activity that we have going on currently in the quarter that will sequentially see a little bit of a bump in OpEx.

Unidentified Analyst

All right thanks Jason and Dave.

David McLennan

Welcome.

Operator

[Operator Instructions] Your next question comes from Paul Treiber of RBC Capital Market. Your line is open.

Paul Treiber

Thanks very much. I wanted to hone in a little bit more on into the automotive vertical. I just as you think about the second half a year I'm sure there's a couple new program launches coming. Do you expect automotive revenue in the second half of the year to be stronger than the first half of the year, when you combined existing and new programs? And then do you anticipate any weakness in programs to be offset by new program launches?

Jason Cohenour

So, specifically with respect to automotive, I'm going to avoid talking about just the second half. We do expect revenue from automotive for the full year to be up full year 2016 compared to full year 2015. That is all new program-driven is the way to think about that. So we are seeing, I would say, some demand headwinds from some of our existing automotive programs, so the growth that we're seeing in automotive and some of that is coming from new programs in the second half, by the way, but our view now is that growth in automotive is new program-driven. And key existing automotive programs, we do not see growth in, and in fact, are seeing some headwinds -- demand headwinds at some accounts.

Paul Treiber

Is that -- do you think that's timing-related or is it end demand -- more end demand-related?

David McLennan

Both headwinds.

Jason Cohenour

You know, I don't know that we have perfect visibility to that yet, Paul. Certainly inventory, tightening of inventory management is a thing. We have seen some very recent July numbers come out from some larger car OEMs that would imply a little bit of weakness in car sales coming in, so some have theorized maybe car sales have peaked. So I think there's a bit of a combination there, so I can't give you a perfect answer, but it clearly -- what we clearly see is a tightening of inventory management and a softening of demand and, if I had to make a call on that now, you'd have to say that that was a little bit softer end user demand.

Paul Treiber

Still on automotive. As you look at longer-term and next-generation design winds that you're seeing, are you seeing incremental, more, a shift from the Tier I automotive suppliers wanting to use, or try and delve into doing their own onboard chip solutions as opposed to using modules? So are you sort of seeing a shift in those suppliers?

Jason Cohenour

What I would call vertically integrated solutions from Tier I OEMs has always been a competitive factor that we deal with, Paul. So that's always been in our automotive business and, candidly, it's a battle we fight every day. We've seen an acceleration of vertical integration. I don't - I can't conclude that. It's always a competitive factor and I think it's always going to be a competitive factor. So I don't think -- I wouldn't point to that as a secular trend in the market causing a huge disintermediation threat to us. In fact, we've seen some favorable shifts in buying process by the car OEMs themselves, that actually could favor us, where car OEMs are actually making the module decision ahead of selecting a Tier I supplier. So there's ebbs and flows, yes, some guys are -- some Tier I's will go vertically integrated, and going the other way, the car OEMs themselves want to -- some of them want to control more of the value chain and supply chain. And that movement actually favors us.

Paul Treiber

Just one last one for me. Just again the cloud and connectivity business. It seems like your comments around the new customer wins are very bullish, but then it's taking a little bit longer to translate into revenue, just looking at it from a sequential basis. Are there any metrics you can provide to help quantify the growth in momentum in the customers? And then how do we think about the timeframe in terms of new customer wins translating into a higher cloud and connectivity revenue?

Jason Cohenour

Well, it takes time, for sure. So the new customer -- so I'm not going to give you -- I'm not going to satisfy you with great metrics here with respect to number of new customer wins or expected recurring revenue. We're tracking that internally and I think when that gets cooked and we're comfortable sharing that externally as a metric, we're definitely going to do that, but in Q2 and in Q1, new customer acquisition, which is, frankly, it's the key thing we're focused on now, Paul, because subscribers and revenue follow the new customer acquisition. So the key focus is there. We've exceeded our expectations and plan in the first half with respect to new customer acquisition, so that's good. But yes, these programs do take time, right? They're generally linked with some kind of technology program much like our OEM programs because a lot of those are -- a lot of those programs do originate with our OEM sales team. So there's an integration phase and then there's a ramp phase. And it's in many ways very similar to what we see in our OEM businesses.

So after you secure a customer win, you start to ramp revenue several months or perhaps even a year later. And like I said, going forward, with respect to key performance indicators, I'm sure we'll be looking at things like number of wins, average annual recurring revenue is a key metric, and subscriber count; these are things that we track internally and we're just not comfortable sharing that with external stakeholders just yet.

Paul Treiber

Okay, thank you.

Operator

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

Todd Coupland

Good evening, everyone. Dave, I just wanted to understand the magnitude of the OpEx increase that you're anticipating in Q3. Roughly.

David McLennan

I'm not going to give you a specific number, Todd, but, you know, modest increase over the 44.4. Not a huge number, but it'll be a modest tick up from that 44.4.

Todd Coupland

Okay. And just -- with just a million or so, it was hard to get to the guide if you're holding gross -- EPS guide if you're holding gross margins flat. So I was just kind of wondering what was happening in the mix there.

David McLennan

Maybe there's some noise in those assumptions made, but it also suggests that the OpEx uptick is not huge.

Jason Cohenour

Yes, I think if you'll finely tune those variables, Todd, you'll get midpoint of guidance.

Todd Coupland

Okay.

Jason Cohenour

I'm not talking about a lot of tuning there. Fine tuning.

Todd Coupland

Okay, fair enough. So the second question I had is just wondering, like you've had a couple of OEM hits this year, and I'm just wondering if, beyond the economy, is there any questioning going on in terms of some of the use cases for M to M. Is that actually starting to play out here at all?

Jason Cohenour

That's not our read, Todd. I'll reiterate: We're very excited about the long term. Customer activity is definitely high, we are securing new customers. You mentioned economy and is that a factor in the lower-than-expected demand from existing OEM customers and programs? Well, we're not economists here at Sierra Wireless, but we kind of think that the macro situation is a factor, and we don't think it's a call on the expected business benefits from deploying IOT applications, nor is it a share shift theme. Our view is there's a little softer demand and that the macroeconomic situation is probably a contributor.

Todd Coupland

I don't think you've given any kind of duration color at this point. Do you have a view that you're willing to share on that in terms of this headwind?

Jason Cohenour

You know, we're not. Because as you know, 90 days ago we reaffirmed our annual guidance, right? So it's -- and that has obviously changed so we are confident that we've got the Q3 outlook right. Directionally, we're confident in our commentary around Q4, but let's face it. There's been some uncertainty and softness that's come into the business that we didn't see 90 days ago. So I think we've got to sail through this chop and see what the water's like on the other side before we make a call on midterm. And by midterm I mean 2017. We've committed ourselves to pursue this 10% to 15% annual growth rate. Today we don't have clear visibility to that. Midterm 2017 is the lower end of the range, a crazy expectation. You, know, probably not, but there's also some uncertainty around that. So like I said, we've got to get through this chop before we make a call with conviction on the midterm. And longer term, we're bullish and we stand by our expectation to 10% to 15%. But we've got to get through this short-term chop before we can get more specific in a responsible way.

Todd Coupland

That's very helpful. Thanks a lot.

Operator

Your next question comes from Paul Striep from Scosche Capital. Your line is open.

Paul Striep

Great, thanks. One quick one. Could you just, Jason, talk about new design activity? Obviously demand's very, very opaque at this point, but new design activity and bidding activity for auto and PC? Thanks.

Jason Cohenour

Sure, Paul. It's active. It's very active and I would say it's, in talking specifically around OEM for a moment, automotive continues to be where we spend a lot of time and a lot of focus. It seems even before new programs go to start of production, the car OEMs are talking about the next generation after that. So activity continues to be high. We won two new programs - automotive programs in China this part quarter. Now, this isn't the stuff of $100 million design wins, but these are two design wins in a single quarter in a key market that's growing. And we are in the fight to win more in the second half. So the activity level has not come down.

You mentioned PC OEM, and PC OEM tends to be kind of a natural 12- to 18-month cycle and that -- we see that cadence persisting, and it typically aligns pretty well with the release of next-generation Intel platforms. And then outside of those key markets, there continues to be a lot of activity around energy and around security as well. So I'm not concerned about activity level. Design wins and win rates are consistent with what we've seen in the past, and we continue to build a pretty strong pipeline of new customer programs that will roll out in the coming months and years.

I'll also say ESBU and the enterprise side of the business, activity is very high as well. Part of that is, I would say, company-specific. We've been product poor in that business unit for the past couple of years, and now we're turning that to be a little more product rich, and that is helping us. New product launches are key. We've invested a bit more in sales. We've changed sales leadership in that business unit, so activity levels are high and we're winning more than our fair share of deals there. And I've already commented on cloud and connectivity activity.

So anyways, hopefully that's helpful. I know it's quite general in nature, but activity levels continue to be high despite than the softer-than-expected existing or established OEM customers and programs.

Paul Striep

Just one very fast wrap-up here. New enterprise products. You expect those to launch in second half. Is it really -- what should our expectation be in terms of uptick and meaningful contribution from these products? Are they significant products or are they just line extensions? Thanks.

Jason Cohenour

I think you should view those new products as successors to existing products, so let's turn the clock back to earlier in the year, so first product -- new product launch in quite a while: the RB50 is doing well and contributing nicely. A second new product launch: the MP70, launched in the second quarter, and that is a successor to an existing product but with updated features and capabilities and application support; we've very bullish on that for key markets. We believe it's a share gain opportunity. And the product launches we expect to see in the second half: again, think of those as successor products but it's also the stuff of continued momentum.

So, now, revenue contribution in the second half from the second half new product launches? Probably modest. The two new products and the existing product line, two new products we've launched so far, plus the contribution from the existing products, are probably going to be the key product drivers for us with respect to revenue in the enterprise business unit. But the product launches later this year, of course, set us up nicely for continued growth into 2017. That's the way to think about it.

Paul Striep

Great. Thank you.

Operator

Your next question comes from Mike Latimore from Northland Capital. Your line is open.

Mike Latimore

Thanks. I apologize if I missed this, but do you have the breakout of 2G, 3G, 4G? Either units or revenue?

David Climie

Yes, I do. Just bear with me for a minute.

Mike Latimore

And related to that, any just general comments on pricing in those three buckets.

David Climie

So just in terms of revenue, and these are Q2 statistics, so 2G was 17% of revenue, 3G was 35%, 4G was 40%, and Other was 8%. In terms of ASPs, generally, over the entire portfolio, we've seen -- we saw stability in Q2 versus Q1.

Mike Latimore

And on the enterprise product segment of resolutions, do you feel like there will be growth from the Q2 levels, or is it a little hard to predict at this point -- for the second half?

Jason Cohenour

We're inclined to expect sequential growth in the second half. I will point out that Q3 of last year was a pretty strong quarter. We had a single big customer deal, so Q3 of last year in enterprise was a pretty strong quarter, so it creates a tough comp, year-over-year comp, in the quarter, but sequentially our expectation is for continued growth.

Mike Latimore

And just on a regional basis, was there -- were customers in any particular region showing those signs of weakness?

David McLennan

No, the list I've referred to of established OEM customers and programs, is largely U.S., Europe, and also some contribution from Brazil. So no real theme to get a handhold on. I would say, with Brexit, some people might be questioning, have questions around that. We have, with respect to the U.K. market, we have very small exposure. I think the percentage of revenue coming from U.K. customers is something like 2.5%. However, with respect to Europe, 30% of the -- where the business originates, for us, not necessarily shipped to, where the business originates, 30% is coming from Europe and Europe's been on a pretty nice growth trajectory for us here. So we're watching that closely, so far we don't see any specific signs of nervousness around Brexit. At least we don't think we see it, and no customers have raised that as a concern.

Mike Latimore

Okay, thank you.

Operator

And there are no further questions at this time. I'll turn the call back over to the presenters.

Jason Cohenour

Thank you, Kelly. So with that, I'll thank everybody for joining today's call and, as usual, Sierra Wireless management is available should you have any follow-up questions. And that concludes today's call. Kelly, you can terminate the line.

Operator

Thank you. This concludes today's conference call and everyone may now disconnect.

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