Sierra Wireless, Inc. (NASDAQ:SWIR) Q3 2019 Earnings Conference Call November 5, 2019 5:30 PM ET
David Climie - Vice President, Investor Relations
Kent Thexton - President & Chief Executive Officer
Dave McLennan - Chief Financial Officer
Conference Call Participants
Thanos Moschopoulos - BMO Capital Markets
Todd Coupland - CIBC
Paul Treiber - RBC Capital Markets
Richard Tse - National Bank
Ladies and gentlemen and thank you for standing by and welcome to the Sierra Wireless Incorporated Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, David Climie, Vice President of Investor Relations. Thank you. Please go ahead.
Thanks and good afternoon everybody. Thank you for joining today's conference call and webcast. On the call today is Kent Thexton, 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; Dave will provide a detailed overview of our third quarter 2019 results; Kent will then provide his corporate update; and then Dave will provide comments on a full year guidance along with an update on our cost-reduction program followed by Q&A.
Before we get started, I will reference the company's cautionary note regarding forward-looking statements. A summary of our cautionary note can be found on Page 2 of the webcast and is now being displayed. Today's presentation contains certain statements and information that are not based on historical facts and constitute forward-looking statements within the meaning of applicable securities laws.
These statements include our financial guidance, statements about our strategy, goals, objectives, and expectations, and commentary regarding the outlook for our business. Our forward-looking statements are based on a number of material assumptions including those listed on Page 2 of the webcast presentation which could prove to be significantly incorrect.
Additionally, forward-looking statements are based on our management's current expectations and we caution investors that forward-looking statements, particularly those that relate to longer periods of time are subject to substantial known and unknown material risks and uncertainties that could cause actual events or results to differ significantly from those expressed or implied by our forward-looking statements.
I draw your attention to a longer discussion of our risk factors in our AIF and management discussion and analysis which can be found on SEDAR and EDGAR as well as other regulatory filings.
This presentation should also be viewed in conjunction with our quarterly earnings release.
With that, I will now turn the call over to Dave McLennan for his review of the third quarter results.
Thank you David. Note that we report our financial results in U.S. dollars and on a U.S. GAAP basis. We also present non-GAAP results to provide a better understanding of our operating performance. A full reconciliation between our GAAP and non-GAAP results is available on our website.
Total revenue in the third quarter was $174 million, down 14.5% compared to Q3 2018. This level of quarterly revenue is below our expectations due to lower demand for certain hardware products, which I will review in more detail shortly.
Non-GAAP gross margin in the third quarter was 31.7%, up from 30.8% in the prior quarter. Our non-GAAP operating expense in Q3 was $53.3 million, down $3.2 million year-over-year from Q3 2018.
The Q3 results reflect realizations of savings from our cost-reduction initiatives, partially offset by selective investments being made to grow our subscription-based services business. The investments we made in Q3 were largely focused on go-to-market initiatives in the areas of sales and corporate marketing.
Our GAAP operating expenses in Q3 including restructuring expense of $6.3 million associated with our cost reduction initiatives. Our non-GAAP net income was $1 million or $0.03 per share compared to $10.5 million or $0.29 in the same period last year.
We have two reporting segments; IoT Solutions and Embedded Broadband. Our IoT Solutions segment is comprised of horizontal and vertical services as well as gateway and module hardware products that provide our customers with fully integrated IoT solutions. This reporting segment is focused on providing highly differentiated device-to-cloud offerings that generate high margin, higher value, end-to-end solutions.
Within this segment in the third quarter, our services revenue increased 5% year-over-year and within that the recurring subscription portion was up 7% year-over-year. This year-over-year comparison excludes the revenue from the iTank Monitoring business which we sold in December last year.
Our enterprise gateway and rental revenue grew 14% year-over-year. While this is strong growth, it was not as strong as expected due to several factors including several large scale customer upgrade projects being delayed and some customers deferred upgrading to 4G as a result of the 3G network sunset being extended. We also saw some excess inventory in the North American distribution channel and experienced reduced demand from one of our telematics gateway customers in Asia Pac.
This growth in services and gateways was offset by year-over-year decline in the lower margin module hardware products in this segment, including a sharper-than-expected decline in 2G and 3G embedded module sales as IoT customers prepared to move to LPWA or 4G solutions and some demand softness in Q3 in the areas of security and energy. As a result IoT Solutions revenue was down $2 million or 2% year-over-year to $93.4 million. In Q3, the IoT Solutions segment was 54% of consolidated revenue.
Sales in our Embedded Broadband segment, which is comprised of our high-speed cellular modules, primarily used in automotive, mobile computing and networking markets, but we typically don't provide the opportunity to provide an end-to-end solution declined 25% year-over-year to $80.6 million. This decrease reflects the expected weaker demand from our mobile computing and networking customer's year-over-year as we complete certain programs with these customers and weaker industry-wide demand in automotive combined with expected delays in the launch of new high volume programs including certain Volkswagen platforms. In Q3, the Embedded Broadband segment was 46% of consolidated revenue.
Looking at non-GAAP gross margin in Q3, total gross margin was $55.1 million, or 31.7% in Q3 compared to $67.3 million, or 33.1% in the prior year. On a sequential basis compared to Q2, our gross margin percentage improved. IoT Solutions gross margin was 37.7%, up from 37.2% in the second quarter and Embedded Broadband gross margin was 24.7%, up from 24% in Q2 resulting in consolidated gross margin of 31.7% up sequentially from 30.8%. In Q3 adjusted EBITDA was $6.3 million compared to $16 million a year ago.
Moving on to the balance sheet, during the third quarter cash flow from operations was $8 million, capital spending in the third quarter was $5.3 million, resulting in free cash flow of $2.7 million and a net increase in our cash balance of $2.1 million during the quarter with $87.1 million of cash.
With that, I will now turn the call over to Kent to provide a corporate update. Kent?
Thanks, Dave. I've been laying out for the past year the path to value creation for our business and shareholders by transforming to an IoT Solutions company with recurring revenue driven from IoT connectivity software and managed service offerings from a mostly hardware-only company. We've made strong progress on our transformation and I will highlight our IoT Solutions success in Q3 as we experienced accelerating momentum and had a record quarter for new recurring service wins.
At the same time, the hardware-only part of our business has been challenging and has delivered revenue below our expectations. We continue to make progress towards our announced target of $200 million in annualized recurring revenue by the middle of 2022 and $400 million by the middle of 2024. This underpins our long-term value creation strategy. We are focused on building our recurring revenue business as it creates greater predictability and a flywheel of accelerating growth. The challenges that, it takes time to build significant volume of recurring revenue units into the market.
To help in measuring the long-term impact of the new recurring revenue business we are generating, we measure the lifetime value of our recurring revenue wins to provide visibility of future recurring revenue. The lifetime value of recurring service wins in Q3 continued to accelerate and was more than twice the value of wins in the second quarter this year. And the cumulative value of wins in the first nine months of this year was 170% of all of 2018.
I'm pleased with the service win rate as we transform our business and we are on track to capture the service wins in Q4 to achieve the $400 million to $450 million range of LTV of design wins in 2019 that I'd set as our target at the start of this year.
The design cycle of our business means these service wins often take about 18 to 24 months to start contributing to our P&L. So while you don't see this progress on our current P&L, there is increasing future value in our delivery pipeline. It is this level of record activity and with many conversations with customers that gives me confidence they're seeing value in our integrated end-to-end IoT Solutions and we are getting solid traction in the sectors of the IoT market that we are focused on. IoT Solutions into the industrial IoT market and gateways and IoT enterprise networking. And we see this progress growing with more higher value and predictable recurring revenue design wins as our current sales pipeline from recurring revenue opportunities has tripled from the beginning of 2019.
In the first nine months of this year, we have added close to 300,000 net new connected devices and now have close to 3.5 million IoT connected devices globally which is up 9% from the end of 2018. The major contributor to that growth has been the uptake of our Sierra Smart SIM, which has really accelerated this year and reflects our higher-value customer wins with device plus services. The Smart SIM connection rate is driving our strong overall growth despite some attrition in devices in our legacy vertical businesses as expected.
We had many strong solution wins this quarter and a good example is our win of a public lighting company based in North America that's deploying our HL7800 Cat-M LPWA module as well as our Sierra Smart SIM to connect each of their lights standards enabling them to sell smart city lighting platforms as a solution as a service. This win is certainly good for our LPWA module business, but more importantly it will help drive our subscription-based service revenue as we provide the customer with more than 200,000 Smart SIM connections in its first deployment.
As a global provider of smart lighting, the customer is focused on five geographic regions and this is a major reason why they selected Sierra because our Smart SIM makes it easy to deploy IoT connectivity around the world. This was a competitive process and our win shows the value of our bundled solution to customers.
We do expect their volume to increase over time as they shift away from RF mesh networks to cellular connectivity, a behavior we're also seeing at many of the smart metering companies. Wins such as this and others this quarter will contribute $1 million to $5 million in annualized recurring revenue as they're fully rolled out.
Another win this quarter was an enterprise networking customer looking for managed connectivity to enable a global consulting client that is growing its business. We were able to provide an AirLink gateway bundled together with connectivity services and managed uptime through our 24x7 network operating center in Atlanta.
This solution is a perfect example of how we can significantly reduce a customer's deployment risk, speed up the time to deployment and scale from a North American rollout to a worldwide deployment. Our solution eliminated any end-to-end integration issues and going forward they will be using our multi-MZ Smart SIM for international services and providing strong revenue per device of $35 per month.
The industrial IoT market has not grown as fast as market predictions. In my discussions with existing and prospective industrial IoT customers, many have expressed frustration with how long it takes them to deploy their IoT programs. Some customers might start with individual parts of the solution, but they often don't have the internal teams or capabilities to implement a fully integrated IoT deployment.
In fact, study showed today that over 70% of IoT projects have failed because of the complexity that is involved. That's where our fully integrated end-to-end IoT solution including the IoT device, cloud management, connectivity and security makes their deployment simple and scalable.
We took a major step in this direction with the announcement in mid-October of the general availability of our Octave all-in-one edge-to-cloud solution for connecting IoT industrial assets. Octave goes a step further in simplifying and derisking IoT deployments for our customers. It provides edge-to-cloud data orchestration, while at the same time providing connectivity and security that is fully integrated.
Octave enables companies to get applications up and running within days instead of months, giving them access to equipment data that allows them to maximize machine performance and uptime, reduce maintenance costs and transform their business models. A recent report published by Forrester Research estimates that companies can get their IoT deployments to market up to 12 months sooner and reduce their overall IoT project cost by more than 40% using Octave compared to sourcing discrete solutions.
I was attending our Innovation Summit in Europe last month, where we had a record number of customers and developers demonstrating their leading-edge IoT applications. Axibio one of our customers, a leader in environmental waste management in Europe has incorporated Octave into its proprietary smart biowaste collector.
For Axibio, it didn't have the dedicated resources to solve their IoT issues, but they simply relied on Sierra and the Octave solution to link the biowaste equipment to the cloud in record time and without any development or installation risk, speeding their time to market and increasing their ROI on their connected waste management installations.
In the third quarter, we integrated Octave into the Microsoft Azure platform and secured our first Octave wins including our first end-to-end Octave, Microsoft Azure customer. This individual customer is in the smart building sector and is connecting ventilation systems to improve uptime, performance and preventative maintenance.
This use case demonstrates how Octave's edge-to-cloud data orchestration integrates perfectly with Azure for our customer's IoT analytical requirements. We are working closely with Microsoft on our joint go-to-market plans for 2020 which will include joint marketing and sales activities and we see significant future growth opportunities from our collaboration with Microsoft and being their preferred edge solution partner.
So with our record design wins our improving opportunities pipeline and our new IoT partnerships, we remain focused on delivering high recurring services revenue. As announced at our Investor Day in June of this year from our current annualized run rate of $100 million, our objective is to deliver $200 million in higher margin recurring services revenue in 3 years' time and then double that to $400 million recurring revenue over the ensuing 2 years.
To further expand our IoT Services and solutions business, today we announced that we have signed an agreement to purchase the M2M Group in Australia for $19.8 million to expand our IoT solutions business in the Asia Pacific region. M2M has a strong history of IoT leadership in Australia. They are focused on growing their IoT connectivity services business and they also sell our cellular gateways and modules.
The business has an excellent strategic fit with our IoT solutions business because slightly more than half of the company's revenue comes from subscription-based recurring revenue. And this part of the business has been accelerating nicely over the last 3 years.
M2M Group's revenue in the last 12 months was €17.9 million of which $9.2 million was recurring subscription revenue. And we expect the acquisition to be accretive to earnings immediately following closing in early 2020. The M2M Group has a solid platform for us to increase our IoT Services and Solutions in Australia, as well as expand into other new regional markets such as New Zealand and Southeast Asia.
So while we're on track to grow our IoT Solutions business enhanced by the purchase of the M2M Group, we're also seeing some weakness in our hardware revenue as Dave noted in his earlier comments. In certain areas of our embedded module business, we are being impacted by the accelerated slowdown in both the auto and PC markets as well as low-cost competition in our modules space.
While we anticipated this in our transformation strategy, it is happening in some areas faster than we thought. Countering this, our integrated device-to-cloud solutions are differentiating us from module-only suppliers and allowing us to win in the industrial IoT segments that we are targeting. And we continue to grow strongly and pick up market share in the enterprise market.
So with our record design wins are improving opportunities pipeline and our new IoT partnership, we remain focused on delivering higher value, recurring services revenue and growing our current annualized run rate of $100 million of service revenue to $200 million in higher margin recurring services revenue in 3 years' time and then double that again to $400 million in recurring services revenue over the ensuing two years.
I will now hand the call back to Dave for the outlook for 2019 and his comments on the solid progress that we are making on delivering our $40 million to $50 million in cost reduction initiatives. Dave?
Thanks Kent. I will now provide an update to our full year guidance and some comments on the fourth quarter. In Q4 we expect IoT Solutions segment revenue to increase sequentially based on growth in our Enterprise Solutions gateway business and improved demand in our integrated IoT modules business. However, we expect the growth in IoT Solutions would be more than offset by a sequential decrease in our Embedded Broadband segment due to a continued decline in our mobile computing business and lower demand from networking customers.
For our full year 2019 outlook, we are now expecting IoT Solutions segment revenue to increase approximately 3% to 4% year-over-year and Embedded Broadband segment revenue to decrease approximately 22% to 23% year-over-year resulting in full year 2019 revenue between $708 million and $712 million.
As a result, we now expect adjusted EBITDA in 2019 to be approximately $23 million and non-GAAP EPS to be in the range of $0.00 to $0.03.
Before we move on to Q&A, I would like to provide a few comments regarding the progress being made on the cost reduction initiatives in 2019. We're on track to meet our target of reducing cost of sales and operating expenses by approximately $40 million to $50 million as we exit 2020.
In the first half of the year, I spoke about initiatives underway, including consolidating R&D in a number of global design centers, reorganizing our go-to-market approach into a single sales and support organization, outsourcing certain business processes in the areas of finance, IT and HR activities and renegotiating our agreements with our contract manufacturing partners.
In the second half of the year, we've continued to implement new initiatives focused on product development efficiency gains, based on further consolidation of R&D and product management teams and additional reductions in cost of goods sold including further reductions in our contract manufacturing costs.
We estimate these additional initiatives will provide approximately $9 million of savings once implemented, bringing the total estimated annual savings to approximately $32 million once fully implemented.
Offsetting this are some selected targeted reinvestments and go-to-market and R&D that will drive growth and product areas such as LPWA and 5G as well as our higher value IoT solutions.
This concludes our formal remarks. Thank you very much. Operator, we can now open the call for the Q&A session.
[Operator Instructions] Your next question comes from Mike Walkley of Canaccord Genuity. Please go ahead. Your line is open.
Hello, sir. This is actually Anthony on for Mike. In terms of the impact of the accounting adjustment this quarter as a result as well as 2019 guidance reduction from previously, how much was the accounting impact? And is there potentially a catch up later on when this impacted revenue maybe recognized later?
I'm sorry. I'm not following you on the accounting impact. Could you just elaborate please?
Yeah. Sure. In the release, it said that third quarter results reflected adoption of ASC 842. Just wanted to know what the impact of that was -- results as well as the guidance?
That's our least standard, Mike. And it doesn't have any P&L impact.
Okay. Got it. And then, just given the revision on the guidance is your three-year and five-year long-term guidance still intact?
Hi. It's Kent here. So, we've been focusing on driving the transformation to IoT Solutions and higher recurring revenue. So, as I highlighted our design wins in the services aspect, the IoT solutions were strong. And yes, we remain on track for that. Shortage, the challenges we've seen have been in some of the module-only areas of our business as well as the previously mentioned PC OEM and automotive. So, we -- we're -- we have done the differentiation to talk about IoT solutions and the drivers of growth and those areas are going well.
I brought to light some customer example, because we are winning good business in those areas with very strong recurring revenues that as I mentioned takes time to get from design win through into units in the field and showing our recurring revenue. But that part of the business is strong.
Got it. And last one for me before I pass on the queue. The M2M acquisition, given the January expected close date what do you expect in terms of the contribution next year? Will there be a ramp? And any synergies kind of baked into the accretive guidance?
Yeah. I think we size it for you in Kent's comment in terms of the trailing revenue and within that recurring revenue side of things. And we do expect some growth off of those numbers in 2019. I would add that the -- the business will be run standalone, and we -- it's been running at about mid-teens EBITDA margins. And we would expect to continue to run it at around that level, and it will be accretive right away when we close.
Got it. Thank you very much.
Your next question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead. Your line is open.
Hi. Good afternoon. I realize it might be a bit early to talk about 2020, but just help us understand directionally some of the hardware headwinds, when you might see them start to resolve. So, I guess the PCs and networking will be challenging for a while but would you expect autos to start improving for example in the first half of 2020 on the back of ramps?
Sure. I'll start off. It's Kent here and I'll pass it on to Dave. I think that we're not giving 2020 guidance yet, but certainly, you're modeling some of the trends. We've highlighted previously that the PC OEM area where we had a couple of design win losses and we've completed shipping products to Lenovo and Dell. And so those come out of our numbers. You're seeing that this quarter and that will be continuation into 2020.
On the countryside of that, we're seeing good growth in our IoT Solutions business with strong growth in recurring revenue, continued strong growth on our enterprise business. So IoT Solutions growing and Embedded Broadband, declining on a year-on-year but Dave any further comments?
No, I think those are the trends Kent.
And maybe just to clarify on the commentary regarding the decline in 2G to 3G as customers are transitioning to 4G and LPWA? When does that start to alleviate?
Yes, I think that business is getting smaller and smaller. I think that slows down as we get into 2020. I will say with the extension of some of the 3G networks we'll probably be active in 3G products for 2020.
Okay. And then as far as gross margins in Q4, how should we think about that directionally compared to the current quarter?
Yes, I would expect some modest improvements sequentially Thanos from where we were in Q3, a little bit of mix improvement coupled with cost-reduction initiatives should see us modestly up sequentially.
Okay. And then finally as far as M&A would you be looking to continue making more connectivity acquisitions? Or now with M2M details that you have the coverage that you need on a global basis?
Yes. Previously the company acquired two MVNOs in Europe and two in North America. And I said previously that got us to scale in those markets. As we've been winning more global customers that look for us to be able to provide connectivity to their devices wherever they ship in the world, we needed to strengthen our position in the Asia Pac. And so this really fulfills that.
MTM has done a very good job in that market and helps us get better connectivity volume and scale in that region and expertise as we work to have continuation extension of carrier relations that we have around the world.
So this was smaller in scale than some of the other ones and fit a specific need. So no, we're not on the trail for further but this was a very good strategic fit. As noted, already distributing our products and a good relationship, so we expect this to build nicely with our business. And we see good opportunities in the Southeast Asia region.
All right. Thank you.
Your next question comes from Todd Coupland of CIBC. Please go ahead. Your line is open.
Yes, good evening, everyone.
Maybe you said this but I missed it, so I apologize if you did. What is the current run rate -- annualized run rate of your recurring revenue? And what's been the growth since the Analyst Day?
Sure. So we did mention in the script that our recurring revenue's up 7% year-on-year. I think it was up 3% sequentially in the quarter. And we're in the elements that are picking up our accelerating as we why we brought to life the first time that net new connected units that is showing strong growth by our Smart SIM. So the elements that are driving that recurring revenue are picking up nicely and we'll see that continue through Q4 and 2020.
And just to size that in absolute dollars for you Todd, the total service revenue in Q3 was 24.6. And within that the recurring subscription amount was 23.5. So as Kent mentioned that recurring amount was up 3% sequentially and up 7% year-over-year.
And did I hear this correctly that your baseline was at about $100 million when you started this journey? So you're a little bit below that now so is that just seasonality? Or what's the bridge?
Yes. That $100 million did have -- when we bought Numerex, they did have a small hardware component in their revenues. So, I think that's what you may be referring to is that included that small revenue -- sorry small hardware component of the Numerex verticals. This is pure services revenue that we're referring to. So to put that in perspective in 2018, it was about annualized -- sorry $92 million of service revenue in 2018.
And as I've said targets both for our company and for the market I've rounded Todd. So, $100 million to $200 million to $400 million is what we're out to achieve. And so we were slightly below the $100 million, but we're -- I'm just using that broadly as our starting point.
Yes. No that's fair. And I'm actually not picking on it I was just trying to figure out where you were in the third quarter relative to that. Okay. That's fine. And then sometimes from other SaaS companies, we hear recurring revenue plus committed revenue or backlog if you will.
Is that something you've thought about disclosing to sort of give us an idea on what you might have booked on top of the $100 million to give I guess a step or a view towards that $200 million? It might be something -- it doesn't sound like you're disclosing it now you've just given hints here or there.
But a minute our contracted revenue might be something to consider putting out there, so we can sort of bridge -- start to bridge toward that -- and then the duration on it and start to bridge toward that $200 million.
Sure. So what we -- what I brought out which is new to our reporting for visibility is this LTV of design wins. So it's meant to capture that. It's meant to capture the recurring revenue. So they say we'll add $400 million to $450 million of lifetime value of recurring revenue from new design wins in 2019 and that's revenue that will show up in future years.
So, when you have a -- many SaaS companies you'll have a piece of business that's going to come in at x value per year. The unique thing about our business is we win a customer like the lighting customer I mentioned as they ship more products each year the amount of recurring revenue continues to increase as the number of products in the market continues to grow over the year based on their shipments.
So, we sort of get the benefit of recurring revenue, but also as I call it the flywheel without winning a new customer that level of revenue grows as they continue to ship their products into the field.
And is there any duration on this $450 million?
Yes. We look at based on the product type we have the number of expected years of service by product type, between three to five years in the main of service. What we will finally talk about industrial IoT customers the product will be there for the generation of that machine.
So, when we are in industrial laundry machines an example we talked about before those will often be in the market for 10-plus years. But we don't take our LTV calculations that were more conservative than that.
So Kent, if we just simplistically -- if we were to divide the $450 million by five that's $90 million. And then -- would we then add that to the recurring revenue that you have as of Q3?
So the -- it wouldn't -- we would divide it by lesser number than five. So it's a bigger number than $90 million of annual recurring revenue that we will have one-off of this year. But you can't add that all to 2020 because it takes as I said 18 to 24 months to get that into production.
So, when we win we're working to try to help customers get to market more quickly, but they'll often do test get their systems up and running ensure the integrations are modules start to ship built into their product. And then after 12 months of shipping, we'll have 12 months worth of devices giving us recurring revenue.
So that's where we take a look at. So if you're taking that design win and saying it's $100-plus million of annual recurring revenue added to our picture, a couple years out then that's more of the way to look at it.
That's the signal you're trying to send here. Okay then that's fine. One last question. So, you've given us the recurring revenue. You've given us what you've added. What is rough churn rate we should think about over that couple of years as we sort of come up with a net number?
Yeah. Churn is always very important in recurring revenue businesses. So in the industrial IoT segment, the churn rate tends to be very low. The cost of a truck roll to ever go out and voluntarily switch something out is so high that you don't see that behavior. And it really is then on the life of the machine. So in most industrial IoT segments we go, the churn rate is very low.
We have some other segments of our business where we have managed connectivity service et cetera that will tend to be shorter life and can have slightly higher churn rates. But the main big segments we're going after in industrial IoT are very low churn rate segments.
So, single digits overall?
Okay, great. Really appreciate the color. Thank you.
Your next question comes from Paul Treiber of RBC Capital Markets. Please go ahead. Your line is open.
Thanks so much. Good afternoon. Just in regards to the PC OEM segment. You spoke about presuming, I guess new design wins in that space. How is that progressing? Should we expect a rebound in that business in 2020?
So, we talked about before, the next design cycle will be typically around 5G. And I think you'll start to see 5G have more of an impact in 2021. I think some first shipments are going to happen in 2020 in the IoT segment, but not substantive. So PC OEM will be similar to a Q4 run rate throughout 2020.
Okay, thanks. That's helpful. And then I imagine the majority of the decline in product revenues is volume related. Can you speak to the trend that you're seeing in ASPs?
Well, I think that some of ASPs and I'll let Dave come in here in a minute but some of ASPs is based on different classes of products. So A, LPWA module is circa sub-$10, whereas, a Cat-1 device may be $20 and then the higher bandwidth modules much higher in price. So there's mix there in our gateway business. We're between $300 and $500 per gateway. So the mix by device is certainly influenced on volume. But David why don't you share further comments on ASPs?
Yeah. I would say other than LPWA, we've seen stability in our ASPs. If you look at our 4G prices, pretty stable over the last four quarters as similar with automotive. So -- but LPWA has declined as to it gets into more volume, we're seeing your price down and you're approaching low $13 areas down to more towards $10 on LPWA.
And I guess extension of that question is what are your thoughts on mix? Have you seen material changes in mix this past quarter? And do you anticipate a mix shift to I guess LPWA in 2020 versus where you were in 2019?
We're expecting this -- we have a lot of -- and we talked about this on our Investor Day we have a lot of customer activity in our funnel for LPWA. So there's lots of market interest in that. The rollout of LPWA has been somewhat slower. Many of the carriers have taken longer to complete their full LPWA rollout. And then all of the features on LPWA like power saving mode so that you can operate in the three to five-year battery life on LPWA module has to have network support. And that's not rolled up back ubiquitously yet.
We're seeing big improvements in the global coverage by the end of this year and continuing throughout 2020. And so we will see continued increase in LPWA. We think LPWA over the coming three to four years, grows dramatically in volume to several hundreds of millions of devices per year as that becomes more mainstream and more supported by carriers globally. So we are on the very front edge of LPWA.
And the volume from a module perspective, you can see that as being lower revenue. But our real attack point here is modules plus recurring revenue services. So the LTV of a design win with LPWA can actually be very strong for us even though the hardware component of it is much lower.
And Paul I'd also add well not a module comment, the other parts of our hardware business that are in the IoT Solutions segment, such as our gateways are also growing fairly rapidly. We saw 14% year-over-year growth in that product line, that hardware product line and that comes fairly high margin as well, mid-50s.
Okay. That's helpful. One last one from me. Somewhat of a clarification question. Just in regards to the recurring services growth you mentioned of 7% year-over-year this quarter. I think last quarter you might have mentioned it's 12%. Is that the right apples-to-apples comparison?
And then, you did mention it grew 3% quarter-over-quarter, but it does look like the year-over-year growth may have decelerated. What sort of the moving parts between the quarters, if you can help us walk through that?
Sure. Let me make some comments and then I'll ask Dave to weigh in. So we had expected some of the businesses that we acquired such as the vertical businesses at Numerex and some of the businesses in Scandinavia from the main gate, aren't areas that we're actively trying to grow, so there have been some declines there.
And that's why I brought the Smart SIM, our strategic adding services to our devices is growing very strongly. So there is a bit of a transition as the growth engines of the future and those design wins I talked about will all be part of those growth engines, are accelerating. And holding back some of that growth is the old legacy businesses, which make up a good part of $100 million today, but are not part -- not a big part of our $200 million to $400 million, because we're not growing those areas.
And just to follow up, Paul. So if you look at -- I will speak about the recurring portion of our services business, it grew about 6.9% in Q2 year-over-year as well.
Okay. Thank you, guys. It's helpful. I'll pass it on.
Your next question comes from Richard Tse of National Bank. Please go ahead. Your line is open.
Yes. Thank you. So as we look at the next 12 months, what are the sort of the major operating initiatives here that sort of drive that recurring revenue components of your base here?
Sure. Hi, Richard, Kent here. We're pretty much right across the board. I have the company focused on attaching recurring revenue to our devices. And so, I'll refer to a few programs of significance here. Starting with our Smart SIM. So our Smart SIM selects the strongest network signal in over 200 countries globally.
And so as we add that to our products, it simplifies the journey for the customer, because they don't have to independently be testing and verifying with different carrier SIMs around the planet. And with our device and hardware book manage by our 24x7 network operating center, we provide a one point of contact to help those customers manage.
The second step up in our more integrated products where we, instead of having a discrete SIM, which we have with our Smart SIM, we're now building directly into our modules and gateways, embedded Sierra Wireless connectivity.
So without even having the requirements for installing a SIM card, the Smart SIM technology is built right into the product and pre-integrated and pre-tested. So that's the next level of integration. And we've just started shipping that product this year and we're rolling it out across our portfolio and that's going well.
And then the third and most integrated approach is our Octave product. So we GA-ed that product, general availability in October. We've signed up first handful of customers already, including one that we have done end-to-end with Microsoft. And so, Octave has the connectivity and security built in directly from device to cloud.
We take the sensor data from the edge, we convert it to events and we just charge the customer per event. They're not even looking at per megabyte charge of those sorts of factors. It's proven to be very appealing to customers, had lots of very strong positive feedback from customers at our Innovation Summit last month, where they're seeing great benefits.
One very large industrial customer was reviewing it in their innovation department and they were complaining that the marketing department had got a hold of it. And before they signed a deal with us, they were busy marketing it to all of their divisions. So it's a simplification of the implementation of IoT.
The Forrester Research that we mentioned said that customers can get to market 12 months faster and save 45% of their development cost with Octave. So those are three areas of focus for us. We're looking to attach service to as many of our IoT solutions, modules and gateways as possible leveraging Ready-to-Connect as a customer benefit and industrial IoT in particular to leverage Octave across the board.
And I would finally add that in our enterprise segments where we run enterprise gateway for our enterprise networking customers, we have a comprehensive software stack as well to help them manage their network and device. And we've been increasing our attach rate of that product and recurring revenue from the software level in addition to the connectivity level.
I would also add our managed connectivity services also are focus to grow as well where we bundled up a gateway with connectivity to provide services to enterprises.
Yes. It sounds like you guys have all the products there. I guess I'm more curious on the sales side. And like is the direct approach the right approach or you need to expand the channel partners like -- so the numbers you guys want to get to it's going to be a massive acceleration. So I'm kind of curious to see what you're doing on that channel or sales side?
Well I will answer that question. When you see massive acceleration when -- the lighting customer we referenced in my script here about 100,000 devices and $10 per LPWA device, it's about $1 million of revenue. But the recurring revenue from those as they get deployed is over twice that amount per year. So it's actually there's a significant value, ongoing value creation, a million onetime on hardware to millions annually. So that's how the recurring revenue side starts to add up dramatically as you add more customers.
But on the sales and go-to-market approach, first of all we've done a lot of training. Q3 was a particularly heavy training quarter of training all of our salespeople and partners the channels we go through on adding services to our devices. And then secondly, partnerships like Microsoft are absolutely key. And a big part of the Microsoft partner ecosystem is SI partners that are trained and leveraged to sell as your products and we've become part of that ecosystem as we're in the Microsoft partner program. So enhancements off of our existing direct salespeople leveraging our current channels and then adding new partners like Microsoft are the three areas that we're driving our service attach.
Okay. And one last one for me. I know that you didn't want to talk about guidance for 2020 but -- sorry we're flying a bit blind here for next year. I'm trying to understand, if we look at the recurring piece, what's the progression like? Is it a steady progression? Or is it something that will kind of really accelerate going into the end of 2021? If you can kind of give us some guidelines in terms of how we should model that I think that would be very helpful for all of us here on the line?
Dave here. I want to be careful. We're not going to talk or provide guidance for 2020 here on this call. I think we did provide some trends that I think could be useful such as a growing trend in our services business. It grew 7% year-over-year in Q3. I think you'll see that accelerate into 2020 and drive stronger growth that way. I think you'll see our gateway business accelerate as well and overall drive decent growth in IoT solutions. We will give some of that back though with Embedded Broadband, particularly with having completed shipments here in the near term to the big Tier 1 PC OEMs. We do have a hole to fill in 2020 with respect to that.
Okay. Thanks, Dave.
We have completed the allotted time for questions. I will now turn the call back over to the presenters for closing remarks.
Okay. Well thank you very much and we will have follow-up calls with many. We look forward to discussing our continued transformation and we've worked to bring more data points forward and we will continue to do so. So hopefully, this helps understand the transformation that we have to towards in IoT Solutions company. Thank you for your time.
This concludes today's conference call. Thank you for your participation. You may now disconnect.