Sierra Wireless, Inc. (SWIR) CEO Kent Thexton on Q1 2020 Results - Earnings Call Transcript

Sierra Wireless, Inc. (NASDAQ:SWIR) Q1 2020 Earnings Conference Call May 7, 2020 6:00 PM ET

Company Participants

David Climie - VP, IR

Kent Thexton - President, CEO & Director

David McLennan - Chief Transformation Officer & Corporate Secretary

Conference Call Participants

Paul Treiber - RBC Capital Markets

Thanos Moschopoulos - BMO Capital Markets

Scott Searle - Roth Capital Partners

Harvey Poppel - Poptech LP

Todd Coupland - CIBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Sierra Wireless First Quarter Earnings Conference Call. [Operator Instructions].

I would now like to hand the conference over to your speaker today, David Climie, Vice President, Investor Relations. Please go ahead.

David Climie

Thanks, and good afternoon, everybody. Thank you for joining today's conference call and webcast. On the call today are Kent Thexton; Dave McLennan; and Sam Cochrane, our new 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 is as follows. Kent will provide his corporate update, Dave will provide a detailed review of our first quarter 2020 results and Kent will provide you a summary comments followed by Q&A.

Before we get started, I will reference the company's cautionary note regarding forward-looking statements as 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, and 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 and that could cause actual events or results to differ significantly from those expressed or implied by forward-looking statements.

I draw your attention to a longer discussion of our risk factors in our AIF and management's discussion and analysis, which can be found on SEDAR and as well as other regulatory filings. This presentation should be viewed in conjunction with our quarterly earnings release.

With that, I will now turn the call over to Kent for his corporate update.

Kent Thexton

Thanks, David. I would like to start my comments today by saying I'm very pleased with how well the global team at Sierra has responded to the COVID-19 pandemic and how we have worked together quickly to adjust to this new and challenging environment while always focusing on delivering leading IoT solutions to our customers.

While COVID-19 has impacted revenue in certain parts of our business and delayed some new introductions, many of our IoT solutions are providing important cellular connectivity services for emergency responders, health care providers and those requiring remote access. And in a time of increasing automation, asset monitoring and robotics, our customers are increasingly looking for simple, scalable, integrated IoT solutions from Sierra that they can deploy quickly.

As you know, we operate in 3 major regions of the world, and our team in Asia was the first team to move quickly to work from safe shelter at home, starting with our R&D and operations team in Hong Kong and Shenzhen,in early March. They navigated quickly through this difficult environment and are now fully operational from our facilities. Our North American and European teams also moved to safe home working environments, and we are now starting to see a slow and careful opening up of business in various jurisdictions. This seamless move to remote working was facilitated by our own products to ensure both better connectivity and performance.

Our overall productivity through this period hasn't been strong, and a recurring revenue win activity has been robust in the first quarter, which I'll be talking about more in a minute. I'm also proud that we have been working very closely with our customers, partners, suppliers and manufacturers around the world as we collectively manage through this period. Given the very dynamic environment, our first quarter revenue was in line with our internal expectations despite some supply chain challenges. Dave McLennan will walk through the financial results in the first quarter in more detail.

On our call today, I would like to comment on our achievements in the first quarter and some external factors related to COVID-19. In Q1, our sales team delivered a record quarter of recurring revenue wins totaling $41.2 million in LTARR. As we've explained previously, LTARR is based on the estimated annual recurring revenue in year three from the time a customer's program is activated, and includes those service wins that we have secured and acquired. To put this in perspective, the $41 million in LTARR in Q1 was more than the total LTARR we reported in 2018 and approximately 45% of the total LTARR achieved in all of last year. These wins are the flywheel of future recurring high-margin revenue growth. We are seeing more industrial and enterprise IoT customers adopting our fully integrated IoT Solutions because they are scalable and improve customers' time to market and have a low total cost of ownership.

At the same time, win conversions and our deployment schedules have been improving. At Sierra, we have the advantage of working with our customers early in the design cycle, starting with our modules and gateways, and then with the discussion immediately expands to our connectivity solutions, edge cloud data orchestration and comprehensive and secure management platform. This fully integrated solution, with the combination of hardware plus connectivity services, is the key differentiator when we are going up against our competition, particularly the low-cost hardware-only buyers.

To illustrate this point more fully, I'd like to quickly summarize a series of 5 wins that we have secured in the first quarter that are highly indicative of our strategy. First, a large HVAC manufacturer, a division of the #1 air conditioning company in the world, wanted to quickly transition from its unstable WiFi networking solution to reliable cellular connectivity for real-time monitoring of its equipment. Our solution was based on the LPWA CAT M1 technology for long reach and low power powered with the Sierra Smart SIM connectivity services. The LTARR associated with this service win was $2 million in addition to $2 million of hardware.

Second, a leading U.S. defense contractor that operates monitoring towers, ground control stations is deploying our RV50X and RV55 gateways and a customized bundled data plan for its high-speed data requirement. Sierra has also provided them with a single platform to manage their gateways and SIMs, and the LTARR associated with this win was $4.4 million plus an additional $1 million in hardware value.

Third example is a U.S.-based company, requiring a robust IoT solution for outdoor monitoring in remote areas, selected our integrated solution with -- that included device and connectivity and cloud management to give the customer a unified system at a lower total cost of ownership. And the LTARR with this win was $1.5 million plus $3 million of expected hardware value.

Fourth example is a fast-growing industrial customer that needed to secure a communications platform for its ground systems and unmanned aerial vehicles. So we provided the customer with a cellular embedded module bundled with a Smart SIM package that provided stable, ubiquitous network access. The LTARR with this win was $1.2 million, along with an expected $2 million of hardware value.

And my fifth example is a specialized glass manufacturer in the U.S. They selected our managed connectivity service to have a highly reliable IoT monitoring system for their large commercial glass installations. They're using our gateways plus connectivity service to provide a premium service to their end customers. The LTARR on this managed connectivity service contract was $2.2 million.

To summarize, these 5 design wins represent approximately $11 million in LTARR, and there is an additional $9 million in expected hardware value associated with these wins. So these use cases are good examples of how we bundle our devices with recurring service revenue to win in the competitive market and drive shareholder value.

Moving on to other activities. In terms of bringing on new talent to the Sierra management team, I'm pleased to announce that Sam Cochrane has joined us starting yesterday as the new Chief Financial Officer of the company. Sam was formally with Motorola Solutions and Avigilon, and he will be spending the next 2 months ramping quickly on the company and ensuring there's a smooth transition from Dave McLennan, who announced in December last year that he would be retiring in the middle of this year. I'm also pleased to announce that Steve Harman will be joining our team as Senior Vice President of Americas sales. After a number of successful years at both SAP and Sybase, Steve served in senior sales roles at Blackberry for the last 6 years,as they went through their critical transformation from a hardware-centric to a software and solution-centric company. Steve will be reporting to me and responsible for all sales and delivery activities in the Americas.

To expand our sales coverage in the EMEA region, we've hired a new VP of channel sales, Michael Freight, who is formerly with Ruckus wireless. Michael will be based in Germany, and is bringing with him 4 colleagues to strengthen our channel relationships in Europe with a key focus on growing our Enterprise Solutions gateway business in the region. This investment will immediately add experience and strong customer relationships in key industrial European markets and in the EMEA enterprise business.

We continue to face some supply chain challenges related to COVID-19 here in Q2 that are similar to other technology companies who are manufacturing in Asia. Last year, we worked hard to strengthen and expand our component suppliers. However, in this current environment, we are seeing some components being placed on allocation that may delay production scheduling. These supply chain issues are constraining some demand in the second quarter.

On the positive side, we have been very pleased with the performance of our manufacturing partners, Flex and Jabil, who are back and now fully operational. we've been working diligently with them to source components for the manufacturing locations in Chuzhou and Vietnam.

We are all aware of the dramatic impact that COVID-19 has had on the automotive sector, and most of our customers' manufacturing facilities have been experiencing partial lockdowns here in the second quarter. Our customers are seeing a temporary but significant delay in demand as showrooms remain close in most of the major markets. While we are pleased that our automotive manufacturing and sales in China have picked back up and we are seeing a slow reopening in other jurisdictions, we will see a significant impact on our automotive revenue in Q2. We are also experiencing some delays in our customers' deployment schedules and carrier certifications despite being in an environment where we are often seeing stable or sometimes improving demand. While it's hard to predict when our customers will get back to the regular cadence of delivery, we have seen many customers start to move in this direction as the EU and North American economies slowly begin to open up for business.

With that, I will now hand the call over to Dave McLennan for his review of our first quarter financial results.

David McLennan

Thank you, Kent, and good afternoon, everyone. Note, 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 first quarter was $157.6 million, down 9.3% compared to the first quarter 2019. Despite a modest impact from COVID-19 during the quarter, overall, these results were aligned with our internal expectations. The first quarter is typically a seasonally low quarter. The year-over-year decline reflects a reduction in hardware sales in our IoT Solutions segment, which I will elaborate on in a moment.

Non-GAAP gross margin in the first quarter was 27.7% compared to 29.5% in the prior quarter, reflecting unfavorable product mix in both of our reporting segments. Our non-GAAP operating expenses in Q1 were $57.4 million, up $2.6 million year-over-year in Q1 2019. This mainly reflects investments in go-to-market capability and marketing initiatives in our IoT segment and the addition of the acquired M2M Group's operating expense.

Our non-GAAP net loss was $14.7 million, and adjusted EBITDA was negative $9.2 million compared to a non-GAAP loss of $0.9 million and adjusted EBITDA of $4.5 million a year ago. The impact of COVID-19 in Q1 was mostly operational. And while we did see some negative impact on revenue in the quarter, it was not significant.

We reopened our Shenzhen R&D facility after the Chinese New Year holidays. And in line with local government directions, our employees working in Hong Kong and Tokyo work from home as much as possible. The lockdown restrictions resulted in factory closures of our manufacturing and component suppliers in China. These operations gradually reopened beginning in late February. While the work-from-home situation did not directly impact our manufacturing partner in Vietnam, they were affected by dependencies on component suppliers in China.

We continue to experience supply chain disruptions relating to our component suppliers located in Malaysia, the Philippines and Mexico as a result of the continuing impact of the COVID-19 pandemic. In addition, logistics supporting the transportation of goods remains a challenge due to the dramatic reduction of passenger flights globally and the insufficient capacity of cargo-specialized flights. These factors, combined with the macroeconomic slowdown from COVID-19 in certain of our markets, is resulting in a weaker-than-expected projection of revenue for the second quarter of 2020.

As I mentioned earlier, overall, our revenue in Q1 2020 was down 9.3% compared to Q1 2019 and was generally aligned with our internal expectations. Revenue in our IoT Solutions segment was down 16.4% year-over-year. On a positive note, recurring and other services revenue of $26.8 million was up $3.9 million or 17% year-over-year, driven by growth in connected devices and the addition of the acquired M2M Group's revenue. However, the solid growth was offset by lower year-over-year hardware revenue as a result of entering the first quarter 2020 with higher than normal inventory in the distribution channel, continuing pressure from low price competitors in hardware-only segments, a transition to lower cost LPWA technologies and some modest supply constraints related to COVID-19.

Revenue in our Embedded Broadband segment was relatively flat year-over-year with higher automotive module sales in the quarter, offset by the anticipated decline in mobile computing module sales to both Dell and Lenovo and some last time buys by certain networking customers, which occurred in Q1 2019.

Looking at non-GAAP gross margin in Q1 compared to a year ago. Total gross margin was $43.6 million or 27.7% in the first quarter compared to $54.7 million or 31.5% in Q1 2019. Sequentially, compared to Q4 2019, gross margin declined by 180 basis points. This reflects lower gross margin in our IoT Solutions segment as a result of lower sales of higher-margin gateways, and in the Embedded Broadband reporting segment, higher sales of lower-margin automotive modules, combined with lower sales of higher-margin mobile computing modules.

Moving on to the balance sheet. We ended the first quarter 2020 with $72.8 million of cash. Specifically in the quarter, operating activities consumed $6.4 million of cash. This reflects the impact of negative EBITDA in the quarter. Capital expenditures during the quarter were $4.7 million, resulting in negative free cash flow of $11.1 million.

Early in the quarter, we completed the acquisition of the M2M Group in Australia. This consumed $18.2 million of cash, net of cash acquired in the business and the extinguishment of certain assumed liabilities. During the quarter, we drew down $25 million on our existing revolving line of credit with CIBC in order to bridge the use of funds to acquire the M2M Group and also to strengthen our balance sheet in light of the challenging COVID-19 environment. Overall, these activities resulted in a $6.3 million decrease in our cash balance from year-end 2019.

Regarding our revolving credit line with CIBC. On April 30, we amended the credit agreement to increase the credit limit to $50 million, up from the previous $30 million limit, and extend the maturity date to April 2023 from the previous maturity date of July 2021. We are very pleased with this amendment to our credit agreement with the increasing credit limit and the extension of term to provides us additional liquidity in these uncertain times.

Regarding our financial guidance, the impact of the COVID-19 pandemic on our global business remains uncertain. While we continue to evaluate the effects of COVID-19 on our business, the overall severity and duration of the adverse impacts related to COVID-19 cannot be reasonably estimated at this time. As a result of the uncertainty surrounding the duration and impact of COVID-19, we are unable to provide a reliable outlook for the balance of 2020. And as a result, we are withdrawing our previous guidance for full year 2020 revenue and adjusted EBITDA presented on February 13, 2020.

We continue to believe that our products and solutions make us well positioned to drive strong long-term growth in an expanding IoT industry when the global economy commences recovery from the ongoing COVID-19 pandemic.

With that, I will now turn the call back to Kent to provide some concluding remarks.

Kent Thexton

Thanks, Dave. In closing, all signs lead me to believe that our competitive position in providing leading edge, fully integrated IoT solutions with both hardware devices and connectivity services is strengthening. And given our strong win activity in growing LTARR, we believe that we remain on track as we drive towards our goal of doubling our recurring other service revenue to $200 million in the middle of 2022 and then doubling it again to $400 million by the middle of 2024.

In addition, I'm pleased that we are seeing a growing number of our industrial IoT and enterprise customers slowly and carefully opening up their businesses and manufacturing facilities, and in certain locations, sent to ramp back up production levels, such as Volkswagen, Peugeot Citroen and FCA.

Regarding 2020, we are seeing good demand signals for our IoT devices and solutions, and we are working to adapt rapidly to the needs of our customers and markets. However, given the unknown timing and potential impacts of economies reopening, our visibility has been reduced. And therefore, as Dave mentioned earlier, we have withdrawn our outlook regarding full year financial performance.

From a Board perspective, we announced on April 16, the Board has appointed 2 new directors, Jim Anderson and Karim Avala. Jim is the President and CEO of Lattice Semiconductor and has worked at senior levels of international technology companies, including AMD, Intel and Broadcom. Karim is active on several boards and was the former General Counsel and Chief Legal Officer of Blackberry for 12 years. So we are pleased to have these experienced individuals join the Sierra Board.

With our new strategic shareholder, Lion Point Capital, we have agreed to include a special resolution in the proxy this year to expand the Board size at Sierra from 9 to 12. If that resolution is passed by shareholders on May 21, then the Board will appoint 3 new independent directors, which I'm very excited about. With Lion Point Capital is a long-term investor, we now have the majority of the company's shares held by institutional investors. And our top 3 investors collectively own about 1/3 of Sierra's shares, and these top investors are focused on long-term shareholder value creation.

Before we open up the call for questions, I would like to say a special thank you to Dave McLennan for serving as Chief Financial Officer of the company since 2004. Dave has been instrumental in growing the company over the years and was involved in many significant M&A transactions along the way, including the acquisition and financing of Wavecom, the divestiture of the USB modem and mobile hotspot business at -- to NETGEAR, and securing the acquisition of both Maingate and Numerex. Dave, I want to thank you for your valued contribution over the last 16 years and your financial stewardship over that time. We wish you the best in your retirement.

And our new CFO, Sam Cochrane, who is on the call today, will be taking over the role immediately and working closely with myself and Dave over the next 2 months to ensure there's a smooth transition in finance. Sam will also be joining me for our analyst and investor call backs following today's conference call.

Moderator, I would now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Paul Treiber from RBC Capital Markets.

Paul Treiber

Just to help understand the potential impact of the automotive production shutdowns, typically, in a typical year, what's the size of automotive against other verticals? And then could you speak to the cadence of the rate of change typically in that revenue stream? What type of visibility or lag do you have to new orders and changes in [indiscernible]

David McLennan

Paul, it's Dave speaking here. Just to roughly size the automotive business for you, you're referring to our segmented reporting statements last year. It was about half of the Embedded Broadband segment to give you a sense of the size of the automotive business, so it's a fairly sizable business. With respect to the ordering patterns that we've seen since the commencement of COVID, we had substantial ramp expectations based on customer platform designs -- sorry, customer platform launching plans in Q2. They've obviously been interrupted with plant closures, the OEM manufacturing plant closures. And we're working with our customers as they reschedule those orders. But without a doubt, we will be down fairly significantly in our automotive business in Q2. And that will be somewhat cushioned by what we expect to be growth in some of our other businesses because we are seeing some decent demand in other areas, but it will be overshadowed by a decline sequentially from Q1 in our automotive business. And these are pretty high-volume customers, so it will be noticeable to the extent that we'll be down sequentially from Q1 as where we currently see our expectations.

Kent Thexton

And Paul, it's Kent here. I'll just add a little bit more color to that. I think that you will have seen most of the major auto manufacturers have shut their plants during Q2. We're seeing most of those reopening at this point in time, so the impact is strongly felt in Q2. The rest of our business has continued along quite well. Q1 is normally seasonally low, and we expect to see the rest of our business continuing to expand in Q2. But the big impact in the major product line for us is automotive, and that will be -- that will reduce in Q2, and then we believe, start to pick back up for the balance of the year.

Paul Treiber

And how are you thinking about your investments in new go-to-market capabilities here? I mean it seems like I just mentioned this number of design wins that you're seeing on the end-to-end side the services. Are you looking to keep all those investments? Or are you considering pulling back some just in light of the shortfall that you're seeing on the automotive side in the near term?

Kent Thexton

Well, I think there's probably two questions there. So on automotive, it's our lowest margin product segment. So while that affects the top line more than it does the bottom line, on the design win side, we have built a strong position in the marketplace, and we're building a strong funnel of design wins for both hardware and recurring revenue and a very strong quarter in Q1 will lead to significant revenue downstream. We're not seeing a significant slowdown in that part of the business in terms of being able to bring on that future value. So we're going to be watching their dollars very closely during these times, as you would expect. We're being very conscious of every expense. We're staying on our strategy of being the leading player in IoT solutions. We have not only a strong design win quarter. Our pipeline of opportunities is growing significantly. And so we're going to be continuing to progress those, and we'll see those continue to build as the time goes. So summary to answer your question, managing cost exceptionally tightly; continuing the strategy of driving complete IoT solutions to win in the expanding IoT and industrial IoT markets; and that automotive will have an impact on Q2, but more from the top line.

Paul Treiber

And then this just dovetails into one of your last comments on the pipeline growing significantly. But broadly speaking, do you see the shift to work from home accelerating the deployment of IoT? And have you seen signs of that occurring yet, at least in the feedback that you're getting in through RFPs and whatnot?

Kent Thexton

I think it's too early for RFPs, but we are closely looking at the changing the work from home, educate from home, have less humans involved to manage assets to track products, devices, do predictive maintenance, et cetera. So I think that the long-term trends were positive. And I think that the changes in the world, if they do anything, they accelerate those. The ability to deploy in the short term is more challenged, but the -- it's reinforced the trends that we were playing into overall. I think that on some of the immediate impacts, we have seen increased demand from some of our customers that are providing connectivity for COVID-related items.

And so that is increased demand -- some areas of that increase has been supply chain challenge, so we can't ship all the demand that we're seeing in some of those areas. And our Sierra Wireless gateways are providing some reach in there. We are more of an industrial and public safety leader in that versus the lower end type of just Wi-Fi hotspot. But we are seeing demand for that. We moved our key operations team managing our network to have a Sierra Wireless routers in their homes so that in addition to their home broadband, they had wireless failover, and that's worked exceptionally well. I am running this conference call from my router, and we've deployed that to a number of key executives. We're continuing to be rolling that out. Just was responding to an e-mail before this call with a major carrier looking for more backup solutions. And so I think there are spots where we get to play in, Paul.

Operator

Your next question comes from Thanos Moschopoulos from BMO Capital Markets.

Thanos Moschopoulos

So you had good bookings in Q1, and you're seeing good pipeline. But can you speak to sales cycles in the current environments? Are they extending? Or are they progressing as normal for the most part in verticals outside of auto?

Kent Thexton

Yes. Thanos, Kent here. Thanks for that question. So as we look at our -- I'm going to talk about a couple of segments of our business. But when we look at IoT Solutions, and the design win cycle of getting modules embedded in products as we've discussed before, the reason we use LTARR was because we have a cycle to get the products out there. And then getting those products deployed give us a reasonable run rate in year three. We've had quite a bit of efforts, and we've seen significant improvement in time to revenue. So we've recorded from when we get the design win to when we get 1,000 units active. And we have metrics and focus on that. We've almost halved the time to revenue from once we started tracking this. And so the cohort of our 2019 design wins has made significant progress, and I expect further progress with the cohort of 2020 design wins.

Thanos Moschopoulos

Okay. That's helpful. And then just in terms of getting -- but I was referring also to just signing the wins in the first place. To what extent -- I mean, March was -- the March quarter was strong, but in terms of the past month or so, what you're seeing as far as customer behavior, are deals taking longer to close? Or is that progressing more like normal?

Kent Thexton

Yes. Of course, there's some impacts. And really, it's getting things signed off or is being impacted somewhat. We continue to have great customer discussions and engagement, so not seeing any slowdown in the demand. I think that there could be some. Our LTARR signings in Q2, some of those would get delayed into Q3 potentially. But from what we're looking to do in the year from a design win perspective, we still feel good. Okay.

Thanos Moschopoulos

With respect to OpEx, how should we think about OpEx in the short term, given some of the cost measures you're taking?

David McLennan

Thanos, it's Dave here. I think we are managing our expenses very carefully here. Salary decrease to the executive team, we've delayed salary increases, we're really clamping down on any discretionary spending in CapEx. We are making some selected investments, though, So we are -- and that's really to feed the longer-term growth, particularly in IoT solutions. So the OpEx that you saw in Q1, I think you'll see a level similar in Q2. And there are some lumpy expenditures coming up in Q2 from a product development perspective, so expect a similar number here in the short term.

Thanos Moschopoulos

Okay. And then finally, can you expand a little bit in terms of the performance of the gateway business during the quarter? And also to what extent, as you look forward to Q2, is that being affected by the supply constraints?

Kent Thexton

Well, as we said, we entered the quarter a bit heavy on some inventory. We talked about in our Q4 results that the delay of the 2G, 3G sunset had slowed some gateway business. And so we were a bit heavy on inventory, and that affected Q1. I think that we, for the year, see that business rebounding. There are areas where COVID's providing opportunities, and there's areas where it's providing slowdown. So for some customers with need for installs of equipment, some of those facilities are closed, and so those installs aren't happening. But when we're into transit buses and public safety vehicles, there's been more opportunities in garages to get installs completed.

So we're continuing to move along. There are some impacts. We've been very active on working to manage through our sales into the oil and gas sector have been challenged, obviously, with what's going on in that area. But public safety and other areas have the opposite effect. In terms of supply chain, there has been -- while our contract manufacturers in Flex and Jabil have remained open and I think done an exceptional job -- Flex was closed for a short time and worked to catch up quickly. A number of our component providers producing factories in Malaysia and Mexico and shutdowns there have hurt some supply. So there will be some likely supply constraints of volume on particular models that can get delayed, but we're working very closely with our suppliers on that. So that's some of the unpredictability that we talked about. But the teams are working hard and effectively in managing those supply constraints.

Thanos Moschopoulos

Great. That's it for me. Dave, congrats on retirement, and I'll pass the line.

Operator

Our next question comes from Scott Searle from Roth Capital.

Scott Searle

Dave, all the best in your retirement. Just to follow-up quickly on the gateway front, I thought you said the gateways were down sequentially. I just want to confirm that. It sounds like certainly from a vertical market standpoint, some of your verticals like oil and gas are a little bit challenged. But is that correct? Did that include M2M? But it sounds like that's starting to come back. So should we sequentially expect gateway/Enterprise Solutions routers to be growing sequentially into the June quarter?

David McLennan

Yes. Scott, it's Dave here. So that's certainly our expectation. As Kent mentioned, there's sectors that are challenged, and you mentioned oil and gas. But there's also demand strengthening in other areas. So we do have expectations of growing the gateway sales sequentially, and we're managing the supply chain to be ready to meet that demand.

Kent Thexton

Scott, it's Kent. I'll just add to that as well. We've continued to focus on strengthening our sales capability in some areas there. So I mentioned Steve Harmans come on as Senior Vice President for Americas, and we'll be driving sales there. And the addition of Michael Freight and a group of his sales colleagues from Ruckus in Germany, helps us with our enterprise capabilities in the European market as well. So we're making investments and drive sales as well as market activity.

Scott Searle

Got you. And just to clarify on the embedded front, it sounds like, in general, that business did a little bit better this quarter because there were some pull-ins from auto. And it sounds like there was some end-of-life as it's related to networking. Could you kind of quantify for us what those pull-ins look like, what that end-of-life kind of looks like for some networking products, so we can be calibrated going into what looks like a declining sequential embedded quarter related to auto? But it sounds like the gross margins in that business are going to be up sequentially.

David McLennan

Yes. So just unpacking that a bit, Scott. So the end-of-life comment was really a comment on the comparable quarter a year ago, and that was in our network modules business where we had some end-of-life products. So the large customers took an end-of-life buy and then work through that in the following quarters. So that was a kind of a reference to a tough comp a year ago on the network side. The other -- with respect to automotive, yes, we had a pretty good quarter in Q1 in automotive. And that's nothing to size there, but it was -- demand was strong. And despite the supply situation, we were able to do a bit of a hurry up in March and meet that demand. So we did conclude with a strong quarter in automotive in Q1.

Scott Searle

Okay. Very helpful. And then in terms of the cloud and connectivity side, the recurring revenue business continues to grow. But can you give us some idea of what it takes to start to improve and see some leverage on the gross margin front there? Maybe as part of that, help us understand how much of that mix is airtime or traffic or devices under management, maybe a little bit of color? And where is Octave in terms of the deployment cycle?

Kent Thexton

Yes. So Scott, it's Kent here. I think that the -- we're starting to see the growth that we've expected to come about. So our overall service revenue was up sequentially by 17%. That's about half organic, half from M2M. When we look at the recurring revenue side of that, it was up more strongly. It was up 21.7% year-on-year. So that growth in our recurring revenue side is definitely happening. We've been talking about this growth and the design wins, the flywheel effect that comes in there. So that will continue to have an increasing impact as we move through the quarters and we move through the years, move towards the $200 million or $400 million recurring revenue that we talked about. As far as Octave, we launched that product in Q4, and we had a number of great design wins in the first quarter. And we expect to increase that design win cadence quite a bit this year. It's moving along well. But because of the time to revenue on those and the LTARR wins, it won't be having immediate impact. The increases we're seeing right now are from design wins in 2018 and the early part of 2019 that start to come to fruition. And so the $94 million of LTARR that we shared with you from 2019, we'll start to be getting more of that as this year progresses. And then the strong Q1 design wins, you'll start to see those in 2021 start to play through and continue to accelerate that flywheel.

Scott Searle

Great. And lastly, if I could, just maybe a quick update on the competitive landscape. Some of the Chinese manufacturers started to show up, I think, more in North America as that was going to trade shows and whatnot in the fall. Certainly, the rhetoric has been amped up a little bit in the current COVID environment and with current administration. So I'm wondering what that competitive dominant landscape looks like? Are the Chinese becoming less competitive, they [indiscernible] and otherwise in the world with some of the OEM design wins that you're going after? If you could just kind of give us an update on what that's looking like in the current environment?

Kent Thexton

Sure, sure. So part of the strategy that we've embarked on in Sierra Wireless was to expand in the value chain and have a more differentiated solution with a combination of our leading hardware and complete service and cloud solution. And that strategy is playing out well. On the hardware-only side, there is margin pressure, there is some commoditization aspects. And that's what we've been working to build a more comprehensive solution for our customers. We shared previously the Gartner study, which showed that we were able to increase customers' time to market significantly and reduce our total cost of deployment by having a completely end-to-end solution that we have to deploy for the customer.

And they weren't having to put all of the components together, do the embedded software engineering at the edge, et cetera. So that differentiation is helping us win a lot of deals. The five design wins I talked about had many low-cost competitors competing for those significant pieces of business. And you heard me talk about not just significant recurring revenue that will come from those design wins, but also significant hardware values that we're winning. So our strategy is playing out well there. In some parts of the market where it's a simpler hardware-only component, those parts of the markets can be more challenged. We've triangled where we want to win and we are, and we work to retain our customers that we've had long-standing relationships with. And so in this changing environment, and I think especially with LPWA where modular costs get lower but volumes get higher, we're -- our strategy is playing out well.

Operator

Our next question comes from Harry Poppel from Poptech LP.

Harvey Poppel

It's Harvey Pill. Poppel. Two short questions. One is a follow-up to the previous discussion, which is when we talk about supply chains, obviously, you appear to have quite a large dependence on China. Even though you have Vietnam and the picture and other sources, what are you doing, if anything, to reduce your dependency beyond China?

Kent Thexton

Harvey, Kent Thexton here. So we have two major contract manufacturing locations. We have Flex in China and we have Jabil in Vietnam. So all of our gateway products and most of our nonautomotive products are in Vietnam. And so we made that move, especially with the tariff situation, a year ago to have all of our end-user products, our gateways built in Vietnam. So that transition has been completed. And so I think that, that has us less exposed to any issues with China. That said, the China economy has opened up more quickly than the rest of the world. So the sort of less component issues from anything coming from China, the component supply chain challenges we've had has been with disruptions in Malaysia and Mexico. And we work to keep ahead of these as best as possible, but in and have been very working closely with Jabil on the Vietnam situation, and they've been doing a very good job of managing that. So it's a moving feast. Myself and our supply chain executives are on the phone 3 times a week to work through exactly what's going on and staying on top of the situations and making estimates, managing inventory levels. So it's fluid, but the team is doing a good job.

Harvey Poppel

Good. And second question was I know you've talked about recurring revenue, in fact, you've emphasized it in your opening remarks. I didn't -- maybe I missed it, but what is the actual level of recurring revenue, what you would classify as recurring revenue in the first quarter with dollar amount?

Kent Thexton

Sure. So we've talked to services and recurring, and the vast majority of our service revenue is recurring. So in the first quarter, our total service revenue was $26.8 million. And of that, the recurring revenue was $25.9 million.

Harvey Poppel

Okay. And that's the sum total of recurring revenue you have in the company, too.

Kent Thexton

That's correct.

Harvey Poppel

Okay. So you have, I mean, a big hill to climb to get to your hundreds and millions of dollars target over the next 4 years.

Kent Thexton

Well, the visibility is quite high because we have the design wins that are fueling the growth. So when we have a customer that -- some of the customers I've talked about previously, we had an industrial lighting customer that was lighting up 100,000 of our modules with our connectivity. And that was $1 million of hardware across the whole deployment, but then it's $1.8 million a year of recurring revenue. So last year, we had approximately 1,200 design wins with print revenue in them. So as these hardware units get deployed, our recurring revenue keeps building. So we have many customers with significant scale as they build out. So we have visibility of those accounts and map through to see where our $200 million to $400 million targets are being produced.

So the Q1 design win of LTARR was ahead of our expectations. So we continue to progress towards the plan we have in place to win more business because we have a differentiated, comprehensive solution that's better for customers. And those wins drive both hardware revenue and long-term recurring revenue, which is valuable because it's repeating revenue. Most of the devices we deploy, like in an industrial light or HVAC system that we talked about, are there for the life of the asset. So 8 to 10 years would be typical. And we get the recurring revenue for that period of time, and our recurring revenue is higher gross margin. And we're seeing gross margin trends improve as we continue to scale our connectivity business.

Operator

Your last question comes from Todd Coupland from CIBC.

Todd Coupland

I wanted to see if I could get an idea about the impact of the auto business. So Dave, first of all, Dave, congratulations on your retirement. I hope you got to do something fun. So we'll miss you on these conference calls. And just for the record, this is fun. Automotive -- on the automotive side, yes. I think you said look back to Embedded Broadband last year. So is the number we should look, the $335 million, so auto is roughly half of that?

David McLennan

That's what I was referring to, yes, just to give you a rough sizing.

Todd Coupland

Okay. So $167 million, $42 million a quarter. So for Q2, should we assume that, that is essentially zero? And then comes back over time, that's a dramatic impact in terms of these shutdowns?

David McLennan

No. No, it's not zero, Todd. The OEM factories are beginning to ramp up now, so we have orders booked in the quarter for Q2. It's just that they're dramatically down from what we saw in Q1. And these are high-volume customers. So that could be a -- it's a noticeable number, but it certainly isn't zero.

Todd Coupland

Okay. That's helpful. And as we think about the pace of how automotive might come back over time, how are you guys thinking about that?

David McLennan

Well, certainly, given the work we've done with rescheduling with our customers, we have expectations of a return to decent levels in Q3. But I do want to caveat that COVID is a daily moving piece here. So that's our current expectation, and we've been working closely with our customers as we reschedule orders to build a book for Q3. But that's caveat about the overall COVID situation.

Todd Coupland

Okay. And then we haven't really talked about this, but there's been a lot of detailed questions on the business ex auto. How are you guys thinking about, I guess, various recovery scenarios? Is it V? Is it an L? Is it a U? What's the chances of some of the -- you did mention briefly some of the orders are taking a bit longer to close. Have you actually seen sort of new decision environment actually show up yet? Or does that still have to play out given whatever the economic backdrop is? And then what would be the sensitivity to those various scenarios? Just qualitatively give us your thoughts on that.

Kent Thexton

Yes. Todd, it's Kent here. I mean I think that if we could put the right alphabet letter with the recovery, we would have been able to give guidance. I think that the challenge is that nobody really knows exactly what the recovery is going to look like. We are -- we've done significant improvements to our forecasting process so that we can be much more dextrous in the capturing of customer demand and playing that through our operations. So we have good demand signals from our customers, but the world can continue to change. So we see things opening up right now. We see customer orders in areas like automotive, in particular, starting to come back. But there's potential that we have further cycles with COVID-19 that can set us back.

We see lots of government stimulus to get businesses going. We're lucky in that we play a large part into -- we are not in the consumer market. I'd say our only real consumer exposure is in automotive. We provide IoT connectivity into industrial processes. We are, lots of, times involved in helping companies save money, and that's going to be very important as things roll forward. So I think that the recovery is the ability for our customers to be able to -- on new product introductions, to be able to test the network, certify and get those deployed. And for our end customers, continuing to sell products, whether that's HVAC systems or industrial lighting or it's pumps, it's measuring in electrical utilities in all of the sectors that we play in.

So we are, of course, caught up in the overall economy, but we are, as a business-to-business provider that is helping provide automation and save companies money, we're in a good place to deal with this. The exact shape of the recovery and the exact impact to our numbers is something that we're obviously doing scenario planning around and ensuring that we will manage our expenses to the right level in all scenarios but also being ready to grow and take advantage of the opportunities the market presents as things start to come back up. So that's a general view that we see things coming back. We have a projection, we run scenarios, and we're ready to react as the market firms up what's going to happen.

Operator

There are no further questions. I'll turn the call back over to Kent Thexton for closing remarks.

Kent Thexton

Okay. Well, thank you, everybody. First and foremost, I hope everyone stays healthy and is managing well through this challenging situation, getting very used to multiple hours of video calls every day, as I'm sure you are. Thank you for joining us today. Glad to share our outlook. Glad to share our continued building success in our transformation to a leading IoT solutions business. And I thank Dave again for his service, welcome Sam on board and new key players of the team such as Steve for the Americas. So thank you very much, and we'll be talking to you many of you shortly. Cheers.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.