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Sierra Wireless (NASDAQ:SWIR)
Q4 2018 Earnings Conference Call
Feb. 13, 2019 5:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sierra Wireless, Inc. fourth-quarter and year-end conference call.

[Operator instructions] Thank you. David Climie, vice president, investor relations, you may begin the conference.

David Climie -- Vice President, Investor Relations

Thanks, Chris. Good afternoon, everyone. 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 fourth-quarter and full-year 2018 results. Kent will then provide his corporate update, and Dave will provide the company's guidance for full-year and first-quarter 2019. That will be followed by Kent's summary comments, and then we we'll open up the call for 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 on 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 the management's 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 Q4 and full-year 2018.

Dave McLennan -- Chief Financial Officer

Thanks very much, David, and good afternoon, everyone. Note that we report our financial results in U.S. dollar and on a U.S. GAAP basis.

However, we also present non-GAAP results to provide a better understanding of our operating performance. As a reminder, a full reconciliation between our GAAP and non-GAAP results is available on our website. We had solid financial performance in the fourth quarter. Overall, consolidated revenue in Q4 was $201.4 million, an increase of 9.7% compared to the same period last year.

OEM solutions and IoT solutions both had year-over-year growth and were in line with our expectations. Enterprise solutions was slightly below our expectations due to timing of some shipments late in the quarter, which resulted in revenues being slightly below the midpoint of our Q4 guidance. Product revenue, which includes all revenues associated with the sale of embedded modules, gateways, routers and other hardware devices, was $178.2 million in Q4, up 5.3% on a year-over-year basis. Services and other revenue, which includes revenue associated with our cloud and cellular connectivity services, as well as engineering support and warranty services, was $23.2 million, up 63% from Q4 2017, driven by organic subscriber growth and the Numerex acquisition that included only three weeks of revenue in the comparable period a year ago.

Services and other revenue was 11.5% of the company's total revenue in Q4. Adjusted EBITDA was $15.3 million, an increase of 9.6% compared to a year ago. Non-GAAP EPS was $0.25 per share, roughly in the middle of our guidance range. In Q4, non-GAAP gross margin was 32.7%, compared to 33%, 33.1% in Q1 -- in Q3, pardon me.

OEM solutions' non-GAAP gross margin was 27.1%, similar to Q3's GM of 27.3%. Enterprise solutions' gross margin was 51.6% in Q4, compared to 54% in Q3. This sequential decrease was as expected and resulted from the impact of U.S. tariffs, which negatively impacted our cost of goods sold for our enterprise products by approximately $1.1 million.

And finally, IoT services' gross margin improved to 44.6% in Q4 from 41.1% the prior quarter, in part due to an improvement in wholesale carrier co weur non-GAAP OPEX in Q4 was $55.7 million, down slightly from the third quarter. We continue to show good cost control, and I'm very pleased we were able to slightly exceed our target which we set at the start of the year to reduce our quarterly OPEX to $56.5 million by Q4. The non-GAAP tax rate in Q4 was 12.2%. Our tax rate reflects the jurisdictional mix of our income across our various legal entities.

Our full-year 2018 rate was 8.3%. Looking at key non-GAAP metrics in the fourth quarter of 2018 compared to Q4 2017. On a year-over-year basis, consolidated revenue increased by 9.7% to $201.4 million, with 26% of quarterly revenue coming from our higher-growth, higher-margin enterprise solutions and IoT services businesses. In Q4, OEM solutions' revenue was $148.7 million, up 6.4% year over year, reflecting increased demand in transportation, energy and industrial, partially offset by lower sales in mobile computing and sales and payment.

Enterprise solutions' revenue in Q4 was $30.3 million, down 5% against a strong comp the prior year when our telematics business was running at a high quarterly run rate due to the bump in demand from implementation of the hours of service legislation in the U.S. fleet transport industry. Support and services revenue and enterprise solutions, which includes our AirLink Management Services grew 32% year over year and continues to add to our recurring base of subscription-based revenue. Revenue in IoT services was $22.4 million, up 89% year over year.

This was driven by organic subscriber growth, as well as the impact of the Numerex acquisition. Looking at adjusted EBITDA and non-GAAP EPS on a consolidated basis. In Q4, adjusted EBITDA was $15.3 million, which was up 9.6%, compared to $13.9 million a year ago. And non-GAAP EPS in Q4 was $0.25, compared to $0.28 a year ago.

Key metrics for the full-year 2018 compared to 2017. On a year-over-year basis, consolidated revenue increased by 14.9%, with 26.5% of revenue in 2018 being generated by our higher-growth, higher-margin enterprise solutions and IoT services businesses. OEM solutions' revenue was $538.2 million, up 5.2% year over year. Enterprise solutions' revenue was $119.9 million, up 18.1% year over year.

And IoT services' business was $90.5 million, up 161% year over year, driven by both organic subscriber growth and the acquisition of Numerex. Adjusted EBITDA for the full year was $55.9 million, which was up approximately 2.2% compared with the prior year. And non-GAAP EPS for the full year was $0.90, compared to $1.05 in 2017. Looking at the balance sheet.

We had strong cash flow generation during Q4, generating $16.9 million of free cash flow. In addition to strong free cash flow in the quarter, we also sold our tank monitoring business, known as iTank. This was a business we acquired through Numerex and we determined that it was not strategic to our core IoT services business. We divested iTank for proceeds of $6 million, of which $5 million was paid at closing, with $1 million being held in escrow pending achievement of certain milestones during 2019.

The iTank transaction closed on December 31st, 2018. During 2018, iTank generated $2.6 million of revenue and incurred a small operating loss. Overall, our cash position improved in the fourth quarter by $21.6 million, and we ended the year with $89.1 million of cash and no debt. I would like to now turn the call over to Kent for an overview of our corporate and strategic initiatives.

Kent?

Kent Thexton -- President and Chief Executive Officer

Thanks, Dave. In the fourth quarter, we delivered solid results, with 10% year-over-year growth in both revenue and adjusted EBITDA, as well as good operating expense control. We also ended 2018 on a strong cash position on our balance sheet. Now let me take you through our strategy for 2019 and also share with you where we expect weakness in some areas of our OEM business in 2019 that will dampen our overall revenue growth for the year.

This masks strong expected growth in the highest value parts of our business, our higher-margin hardware and recurring revenue segments. Let me share with you our strategic agenda going forward and how I plan to manage the transformation of the business to build on our strong and differentiated market position with a view to creating shareholder value in the years ahead. As the new president and CEO of Sierra Wireless, I spent significant time with our customers, suppliers, partners and employees. I have a different lens as CEO than as a board member.

I see tremendous opportunities over the next three to four years, but I am also focused on some short-term challenges that I'm taking rapid action on. Strategically, I intend to accelerate the transformation of Sierra Wireless to becoming the leading global IoT solutions and services provider. We believe the total Sierra Wireless addressable market for IoT solutions is expanding rapidly, growing to over $10 billion by 2021. I believe Sierra is in the strongest position globally to win with our highly differentiated device-to-cloud value proposition.

However, we need to move faster to capture a strong share of this IoT growth opportunity. So I've been taking action and, together with the board of directors, making strategic and organizational changes to transition the business and invest in the future of the company. In addition to these changes, I'm implementing a program to both invest in activities to drive growth and high-value solutions capabilities in key product technologies, as well as implement efficiency and cost-reduction programs to fund these initiatives. Organizationally, as I mentioned during our last call, I have appointed Jason Krause to the position of chief operating officer, and he has been working diligently with our engineering, operations and product and solution teams over the last four months to roadmap a strong portfolio of products and solutions to enable us to more rapidly expand our integrated IoT solutions offering.

To do this, Jason has centralized our three development teams into a single R&D entity that has brought greater efficiency, rigor and improved focus on execution. In addition to refining and streamlining our R&D processes, we've also centralized our product management to bring an integrated approach to providing end customer solutions. And our operations team has been working with our component suppliers and contract manufacturers to seek ways to improve our process and efficiency and reduce our cost of goods sold. At the front end of the business, I have reorganized our go-to-market teams to prioritize on key IoT market segments so we can attack the $10-billion TAM that I referred to before and target customer opportunities.

I have reorganized our sales team into a single unified sales and marketing organization focused on leveraging our IoT module leadership position into more highly integrated device-to-cloud solutions, targeting the most profitable IoT segments to allow us to get our customers to market faster and enable them to scale their deployments quickly, modernize and create new revenue streams. We recently completed our Global Sales and Solutions Conference in January, focusing our global sales leadership on the opportunities ahead and lining up our sales resources under Marc Osgoodby, our global sales leader; and announcing our global solutions capability under Marc Overton, our chief solutions officer. And along with industry veteran, Rene Link as chief marketing officer, we have much better alignment in our global sales team today under new leadership. And our people are excited about selling new and existing customers a bundled solution of devices, connectivity, cloud management and security.

We are also rolling out realigned compensation structures to reward solutions and recurring revenue. I have combined the leadership of our strong, global channel distribution activities to increase effectiveness and efficiencies. Our channel partners are a key part of our go-to-market program. As Dave mentioned earlier in his comment, we are also divesting some small assets that came with the Numerex acquisition, which are non-core to our strategic initiatives.

We have a strong balance sheet, and we're taking the opportunity to simplify our business and give us focus and resources for the major market opportunity before us. On the cost side, I'm driving significant and sustainable programs to get more efficient. We are taking steps to reduce our cost of goods sold and operating costs by approximately $40 million to $50 million over the next 18 to 24 months. We have undertaken this cost reduction program with assistance from a third-party consultant, and we believe this transformation will lead to an improved operating model, provide capacity to reinvest in the business and create long-term shareholder value.

Decentralization of our R&D resources is part of our efficiency and effectiveness move, and so far we have closed several small R&D sites as part of the centralization process. And in addition, we have commenced efficiency initiatives in other areas. We believe that our target savings of approximately $40 million to $50 million is achievable. While I'm driving cost reductions to enable a more profitable long-term business model, I'm simultaneously leading us to make important investments today in advance of our anticipated cost savings delivery to accelerate our leadership in device-to-cloud solutions and increase the flywheel effect on our driving subscription-based revenue.

To accomplish this, we need to invest in important technologies and innovations such as developing our intelligent edge software capabilities to enable improved data management between the cloud and the edge of network; enhance our global embedded soft SIM initiative, which we call Ready-to-Connect, and our global connectivity footprint and capability, designing leading edge 5G embedded modules for the growing automotive and enterprise market, as well as incorporating this technology into our gateway and router devices; and increasing our security capabilities for data management from cloud to the edge. Additionally, we are investing in our sales systems and people to support the sale and delivery of recurring revenue solutions. And we also plan to leverage our strong device position to capture market share in two significant growth cycles: one, the mass deployment of LPWA, Cat-M1 and NB1 technology globally, which started in 2018; and two, deployment of 5G LTE and 5G New Radio that will begin in the next couple of years. We believe that LPWA modules will lead to mass IoT adoption, with industry volumes growing several hundred million units annually over the next three to five years, and that 5G is going to have a meaningful impact starting in 2022.

As evidence of our focus on solutions, we announced in January that our Ready-to-Connect solution has gone into production on selected embedded modules and will be rolling out across a broader range of our embedded module product line in 2019. Ready-to-Connect has all the key elements required for fast deployment of an IoT application. It include a Sierra Wireless cellular module with an integrated SIM that is already pre-connected to global networks and supported by our AirVantage IoT platform. By removing the complexity around SIM integration, it allows our customers to innovate in one third of the time and eliminates the need to manage numerous vendors and platforms.

Ready-to-Connect uses our multi-operator Sierra Wireless Smart SIM to provide reliable global IoT connectivity, allowing businesses to use the same solution wherever they deploy. We believe this technology is a game changer. And other than Sierra, we are not aware of any other significant player in the IoT space that have a global MVNO, their own multi-MD SIM, a leading cloud platform and 25 years of device expertise. Some IoT players may have disparate parts.

However, they don't have the ability to provide a fully integrated end-to-end IoT solution like Sierra can, one that is simple, scalable and secure. We already have some significant design wins in our Ready-to-Connect solution in Europe and North America. These should be ramping up later this year, and we are receiving very positive responses from customers globally. I'll be sharing more with you about this Ready-to-Connect win at our analyst day meetings in Q2.

As I have discussed previously, when we sell our full solution versus just our hardware, we increase customer lifetime value by three to five times. And with the lower modular cost with LPWA, the ratio becomes much larger; and recurring revenue, a key value driver. The opportunity before us is significant. Today, we sell approximately 20 million modules per year.

With the market accelerating and with the beneficial impact of LPWA, we see strong module volume growth over the next few years. For example, if we assume in the future 40 million modules sales per year, and assuming a 25% attach rate, I would hope to achieve more, we would add 10 million recurring revenue devices per year. At a minimum revenue assumption of $10 per year, that could potentially add $100 million of incremental recurring revenue per year. I have talked to many customers, and they find our solutions offering highly appealing and differentiated.

They tell me that implementing an IoT project can be very complex and expensive. In fact, studies show that today, over 70% of IoT projects fail. Our complete solution offering is designed to solve this challenge. Here are some examples of new device-to-cloud wins.

We've secured a new design win with Unimar, a global supplier of tower lighting products related to the aviation industry. Unimar needs to collect mission-critical data from the edge of the network to ensure that flight path hazards are properly marked and complying with FAA protocols. To reduce complexity and to get to mark quickly, Unimar selected our AirLink RV50 gateway, our SIM and our AirVantage cloud platform. Another good example is our device-to-cloud solution is our customer with MANN+HUMMEL, a large European-based company that is using IoT for preventative maintenance on mobile equipment.

With this customer, we are providing our Sierra Smart SIM connectivity service and AirVantage platform, and we're working with them on LPWA Cat-M1 solutions. With real-time monitoring of their mobile equipment, MANN+HUMMEL can save approximately $750,000 per year on maintenance costs on an average fleet. So there's rapid payback on this IoT application. I want to share with you the way we are looking at the market and looking at our business in two components, and I will talk about both.

We are currently evaluating these two business segments to manage our focus and more clearly delineate our solutions activities. As a result, we are looking at one business area focused on what we call embedded broadband, and the other focused on IoT solutions and services. The embedded broadband segment would be comprised of our high-speed cellular embedded modules that are used in the automotive, mobile computing and networking markets. These are valuable segments that drive overall volume and cash flow for us, but with lower gross margin and higher variability as we are not typically able to attach connectivity services to these devices.

We have a strong customer base in these embedded broadband businesses that will be transitioning from 4G/LTE to 5G. This is a high-volume business with some very strong global customers. As an example, we expect our existing automotive OEM design wins to date, excluding any potential new 5G wins, to deliver approximately $1.1 billion in revenue over the next five years. At times this embedded broadband group can be affected by macroeconomic headwinds and various design win cycles as we've seen.

Before taking over as CEO, certain product investment decisions were made that favored investing in automotive to the detriment of some requirements of our mobile computing and networking customers. Consequently, while we are enjoying success in the automotive segment, we expect our market share to decline in mobile computing until the next cycle of 5G design wins. These past decisions are negatively impacting our financial performance in 2019. With some declines in our PC OEM and networking segment, and automotive ramping later in the year, Q1 revenue has some additional time weakness.

Thus, we expected the embedded broadband segment, which was slightly less than half of our 2018 revenue, will decline in 2019. In addition, due to a ramping of lower-margin automotive business and some one-time declines in higher-margin mobile computing and network business, we expect gross margin overall profitability for this segment to be significantly weaker this year. I'm disappointed in this situation but have now refocused the company on regaining our traditional market leadership. We have extremely valuable global customer relationships, and we are investing in our 5G embedded module roadmap where other module players may not be.

I believe there's a great opportunity to win many new design wins going forward and to drive long-term growth and value in this part of our business. The other business segment that we are evaluating is IoT solutions and services. This would include our existing IoT services business, our enterprise solutions gateway and router business and our IoT module businesses where we have the opportunity to provide our customers with subscription-based connectivity services. We believe this is an attractive business for Sierra because we can provide our customers with a fully integrated end-to-end IoT solution including device, be it module or gateway, together with connectivity services and cloud-based management.

We can provide a differentiated offering with greater edge intelligence, security and integrated device management. In 2018, this business was slightly more than half our revenue. And going forward, we expect to grow this high-margin IoT solutions and service businesses faster than our embedded broadband business. In 2019, we expect this segment to grow strongly at over 10% year over year, with gross margin in the high 30% and increasing.

So in three to four years, we would target to have a total revenue well in excess of $1 billion, with approximately 60% of the revenue coming from IoT solutions and services, with gross profit margins in this business segment being north of 40% and growing. We have a large focus on growing recurring revenue, and our objective is to realize approximately 30% of this segment's revenue from recurrent revenue services in three to four years, and growing from there as customers further roll out their IoT solutions. We view the IoT solutions business as a strong value creator for Sierra, with higher gross margins, good growth and valuable recurring revenue, and should attract a commensurate rerating as this becomes more apparent. This new business segmentation is a work in progress, and we'll be providing you with more information on this during our Q1 results call in May and planned investor day presentations, but I wanted to give you a preview of our direction today.

I will turn the call back over to Dave to outline financial guidance for 2019.

Dave McLennan -- Chief Financial Officer

Thanks, Kent. I'll now provide our guidance for full year and first quarter of 2019. For the full year of 2019, we expect revenue to be flat compared to 2018. Within that in OEM solutions, we expect a modest year-over-year percentage decline of mid-single digits, driven by factors in two major segments.

Firstly, in our automotive business, we expect the ramp commencing in Q2 of two new design wins, including Volkswagen, to be more than offset [Inaudible] softness overall in this sector, resulting in solid year-over-year automotive growth. This is offset by a decline in our PC OEM business. In Enterprise Solutions, we expect our Gateway and Router business to grow at a similar rate as the 18% year-over-year growth we realized in 2018, driven by product and go-to-market investments. And in IoT services, we expect a year-over-year percentage growth rate in the high-single digits, adjusting for the sale of the iTank business at the end of 2018.

We expect non-GAAP gross margin to be in the range of 31.5% to 32% for the full year. And as we make investments ahead of the impact of our cost-reduction initiatives, we expect our OPEX to increase throughout the year, resulting in full-year adjusted EBITDA of approximately $35 million and non-GAAP EPS of approximately $0.30. We estimate our 2019 full-year non-GAAP tax rate to be approximately 12%. In the first quarter of 2019, we expect revenue to be in the range of $170 million to $174 million.

Our Q1 revenue guidance reflects several important factors in our OEM customer base. Our mobile computing customers are continuing to experience a shortage of Intel CPU processors, which in turn is impacting demand for our cellular modules in Q1. We are seeing a slowdown in the global auto sector. Consequently, some of our large customers are working down inventory levels in Q1, negatively affecting demand in the quarter compared to Q4.

In addition, we are experiencing lower demand from certain networking customers and generally some macroeconomic headwinds. We expect sequential revenue growth in enterprise gateways and IoT services to be relatively flat sequentially from Q4. Our non-GAAP gross margin in Q1 is expected to be in the range of 31.5% to 32%. This range is based primarily on product mix in our OEM solutions and enterprise gateways businesses.

We expect non-GAAP OPEX in the first quarter to be up slightly compared to Q4. We typically have higher sales and marketing costs in Q1, driven by the timing of major trade conferences and training events. As a result, we expect first-quarter adjusted EBITDA to be in the range of $2 million to $4 million and non-GAAP EPS to be in the range of negative $0.02 to negative $0.06. Our Q1 non-GAAP tax rate is expected to be approximately 12%.

With that, I'll turn it back to Kent for summary comments.

Kent Thexton -- President and Chief Executive Officer

Thanks, Dave. So as the new CEO, let me recap on the future for Sierra Wireless. We are in an exciting market that we believe has significant growth potential. We believe the acceleration of the IoT market will be led by providing full solutions to enterprise and industrial customers to get their valuable edge data to the cloud and build new revenue streams and to reduce costs.

Our IoT solutions and services business is of scale today with over $400 million in revenue, 22% recurring revenue and high-30s gross margin. We are targeting growth in this area to exceed 10% in 2019 and to accelerate in future years as our service offerings mature. I have reorganized the company, and we are investing to accelerate growth and results here. As presented, as we look at this business three to four years out, we would look for it to be over 60% of our $1 billion-plus revenue, to have gross margins north of 40% and growing, and with recurring revenue to be approximately 30% and growing.

We have a strongly differentiate offer to enable enterprise and industrial customers to improve their time to market and increase their ROI on IoT projects. Our IoT solutions focus is positioned to create strong shareholder value. Our embedded broadband segment is expected to have a week year in 2019 as a result of expected macro headwinds and some missed design cycles, but our customer relationships remain very strong. To enable our transformation, I am focusing on reducing cost by approximately $40 million to $50 million, realigning organizational leadership, disposing of non-core assets and improving overall business predictability.

Simultaneously, I intend to lead substantial investment in our IoT solutions capability to accelerate our growth in this area. In conclusion, I'm very excited about the prospects for the company, and I look forward to transforming the business. We have a lot of work to do, and 2019 is an investment year for Sierra Wireless. But I believe we're now on the right path and we're making the right investments as we enter the next phase of global growth in IoT.

Thank you. Chris, we can now open up the conference call for Q&A. 

Questions and Answers:

Operator

Certainly. [Operator instructions] Your first question is from Mike Walkley with Canaccord Genuity. Your line is open.

Mike Walkley -- Canaccord Genuity -- Analyst

Hey, thanks. Maybe just starting with the embedded broadband business. Can you help us break out how much PC was in terms of that mix in 2018 and how much it's down in 2019? I'm just trying to connect the dots from some more positive commentary on IoT hardware companies relative to your guidance. I want to see how much PC impact is that relative to the rest of the business on the module side.

Thank you.

Dave McLennan -- Chief Financial Officer

Hi, Mike. It's Dave. Yes, we've got three big buckets in the embedded broadband, or in the OEM business I should say. Automotive would be the larger of the buckets.

PC OEM is large, but it's not the largest. But we don't break it out specifically.

Mike Walkley -- Canaccord Genuity -- Analyst

OK. And then just on LPWA, clearly an investment area. Where do you guys think you are relative to the competition? You think you're a little behind and some people are getting an earlier start? Or you feel like that roadmap's on track? Is that impacting your guidance at all for 2019?

Kent Thexton -- President and Chief Executive Officer

No, we think we're in a very strong position on LPWA. We've rolled out live to customers. We have embedded advance power management features. And we also have our embedded connectivity that we can roll with that service.

So I think it's just early days. Carriers' rollout of LPWAs are not complete yet. In Europe, we'll be focusing on 2G fallback with our LPWA modules so that we can -- and again, we have some competitive advantages there using our own 2G IP. So we're strong.

And the other major component we're doing that I talked about, the management at the edge, is we have a unique value proposition that is significantly ahead of the market where we embed our device and connectivity along with an ability to do edge processing, which allows customers to get their edge events to the cloud without having to do what would regularly require a lot of integration work, a lot of design work. We have an end-to-end solution that implements quickly. We had one of the early customers on our latest protocol speak in our sales and marketing conference and talking about how from first devices they were able to get edge data in two hours. And previously, they were looking at two months to two years to be able to make the whole system work.

So we're feeling very strongly about LPWA.

Mike Walkley -- Canaccord Genuity -- Analyst

OK, thanks. And last question for me and I'll pass it on. Dave, just on the model. I guess with auto ramping, is the old OEM solutions business, I'm not sure if you guys are going to change how you report going forward, but given that business unit kind of the back end to your guidance, I'm getting maybe a mid-25% gross margin for that business.

Is that kind of a good way to think about it given change in mix and lower revenue? Thanks.

Dave McLennan -- Chief Financial Officer

Yes. It might be a little bit more compressed than that, Mike. But you are pretty close.

Mike Walkley -- Canaccord Genuity -- Analyst

OK, thank you.

Operator

Your next question is from Thanos Moschopoulos with BMO Capital Markets. Your line is open.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Hi, good afternoon. Maybe just expanding on the last question. As we look at the gross margin compression you're anticipating in Q1, is that entirely coming from OEM? And are margins expected to be relatively stable in enterprise and Services?

Dave McLennan -- Chief Financial Officer

Hi, Thanos. This is Dave. So OEM will be down we think sequentially a little bit, not a huge amount; and so will enterprise gateways business, down a little bit. That's more of a short-term customer mix in enterprise, driven by some more telematics, lower-margin gateways than our AirLink gateways.

And then we expect an improvement in our gross margin on the services side.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Has the tariff issue been full resolved at this point in the gateway business?

Dave McLennan -- Chief Financial Officer

Close to. We move quickly and moved production in Q4 from China to Vietnam. That cost us about $1.1 million in move costs and direct tariffs. There will be a little bit in Q1, probably around $300,000 impact would be the current view.

And going into Q3, we will be probably seeing most things in Vietnam. TThey'll be subject to tax, or tariffs I should say.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

OK. And in terms of the mobile computing market, should we be looking for recovery in the second half of the year as Intel shifts its new chips, I guess notwithstanding your earlier commentary about market share?

Dave McLennan -- Chief Financial Officer

Yes. We have pretty conservative expectations of that, Thanos, in that part of our business. As Kent mentioned, design cycles come and go, and we're also experiencing in the near term the Intel CPU shortage. So we're pretty careful on our outlook there.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

And remind us, I mean, PCM -- sorry, PC OEM margins are higher than the OEM average, are they not?

Dave McLennan -- Chief Financial Officer

Yes, they are.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Yes. OK. And then maybe just one last one for Kent. Maybe it's too early to comment, but you started shipping some Ready-to-Connect modules in December.

Any early feedback? Any positive proof points as far as attached rate for services? Or is it just too early to really make any conclusion at this point?

Kent Thexton -- President and Chief Executive Officer

Well, it's still very early. We have a number of design wins, and the customer feedback has been very strong. So the design wins we have right now are 100% attach rate. To get to an overall attach rate, we need to have more of our modules lined up, and we're working to sell more broadly across and see which customers and which applications they want the end-to-end solution from us and which customers want to be able to manage their carrier connectivity discreetly.

So those we will be -- we're doing investor meetings in May, and we'll talk more about our services business. But we're not ready to forecast attach rates yet, although that is a key and important metric that I'll be watching.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. Thanks. I'll pass the line.

Operator

Your next question is from Steven Li with Raymond James. Your line is open.

Steven Li -- Raymond James -- Analyst

Thank you. Hey, Kent, Dave. A few questions. Dave, can you repeat how much growth you're expecting for OEM, enterprise and IoT in 2019? I missed that part.

Dave McLennan -- Chief Financial Officer

Sure. For the OEM business, and this refers to the existing business unit, not the new segmentation that we're working on, but for the OEM business we're expecting probably a mid single-digit decline year over year. And enterprise, we're expecting, the enterprise solutions and gateways, we expect that to be growing at or above the 18% year-over-year growth that we realized this year in 2018. And with IoT services, if you exclude the impact of the iTank sale in 2018, we expect that to grow in the high single digits year over year.

Steven Li -- Raymond James -- Analyst

OK. And so on the OEM, so given Volkswagen has been ramping, so does that mean just the delta there is just the macro factors you've talked about in auto? That's responsible for it?

Dave McLennan -- Chief Financial Officer

It's that So we do expect growth in automotive, but it's the ramp of Volkswagen and another new program that's offsetting, more than offsetting the headwinds in the overall industry. But we also expect our PC OEM business to decline as well.

Steven Li -- Raymond James -- Analyst

Right, right. OK. And on that, the PC OEM, were these share losses unexpected? And why would you have to wait for the 5G cycle to regain share? Thanks.

Dave McLennan -- Chief Financial Officer

Well, it's a function of when we design products we have to make some choices. And so we've designed for servicing the automotive business, which made us a little less competitive in servicing the PC OEM capability. So yes, those design wins will roll off, but we'll be hard at it developing new 5G product, which we expect to have a shot at reearning those design wins. And then we'll also continue a stable of smaller PC OEMs throughout the piece as well.

Kent Thexton -- President and Chief Executive Officer

Steven, this is Kent here. On the PC OEM marketplace, in Sierra Wireless' history, there's been other design cycle losses, and then those customers have been won back. So we've been a strong player there. But as I said, I'm disappointed from how some of that has played out.

And our plans for the year ahead is strong work on 5G and to be back winning our leadership position in those marketplaces. In terms of your question of why wait for 5G, so you essentially have a particular technology that's going to go with a particular product line. And once it's designed in, there's typically no change to that. The next interface comes along and for later computer product lines, and that's the way that market goes.

It's therefore lumpy, which has caused challenges in the past. And it is part of our focus on growing our IoT solutions business with higher recurring revenue and much more predictability.

Steven Li -- Raymond James -- Analyst

OK, that's helpful. And on the restructuring, can you quantify the cash impact? How much restructuring disbursement should we expect in 2019?

Dave McLennan -- Chief Financial Officer

Steven, it's Dave. We're working through various plans right now. So as we get closer to working on those initials, we'll be clear about that.

Steven Li -- Raymond James -- Analyst

And the time frame for the $40 million to $50 million cost reduction, is that exiting 2019?

Dave McLennan -- Chief Financial Officer

It's actually a bit of a longer horizon, 18 to 24 months, Steven.

Steven Li -- Raymond James -- Analyst

Eighteen to 24. OK. And then last question for me. Which quarter would be the bottom for gross margin in 2019?

Dave McLennan -- Chief Financial Officer

You can see that our Q1 gross margin range is similar to our full year, so I think it'll bounce around in that range a bit.

Steven Li -- Raymond James -- Analyst

All right. Great. Thanks.

Operator

Your next question is from Scott Searle with ROTH Capital. Your line is open.

Scott Searle -- ROTH Capital Partners -- Analyst

Hey, good afternoon. Thanks for taking my question. Just to follow up quickly on the cost reduction of the $40 million to $50 million as you're looking at 18 to 24 months. Clearly, it's certainly coming in a 2020 time frame where it impacts you.

But in the interim, OPEX is actually going to be increasing as you're making that investment into software, into 5G, into LPWAs. Is that correct over the next couple of quarters besides the seasonality that we see in the first half? That number does, on an annual basis, '19 is still going to be higher than 2018 given your sales and gross margin guidance. Is that correct?

Dave McLennan -- Chief Financial Officer

Yes, Scott, you say that very well. We are investing to drive services growth and drive some technology investments, and that will increase OPEX in 2019 while we are hard at it taking cost our of the business as well.

Kent Thexton -- President and Chief Executive Officer

Just a clarification, we manage those very discreetly. So we're very clear on where we're taking cost out with efficiency, and then very discreet in our investments to drive future growth.

Scott Searle -- ROTH Capital Partners -- Analyst

Gotcha. And just a couple of clarifications. In terms of the PC OEM share loss, do you see this segment then going to near zero over the next 18 to 24 months until we're waiting for a 5G cycle to start? And will you be changing reporting segments as well, given how you were kind of breaking out sales in your earlier comments?

Dave McLennan -- Chief Financial Officer

The first question, Scott, on the PC OEM segment. No, we've got many customers there. We've got Tier 1s and Tier 2s, and so we expect to continue to be a meaningful supplier to some of those customers. But others will go away as the design wins end.

And we'll be pitching that business with new 5G product. With respect to segmentation, kind of work in progress. We shared our thoughts with you on the two segments, embedded broadband and IoT solutions and services. We'll be refining that over the next quarter.

And then when we report in Q1, we'll be very clear on any new segmentation if we've made some determination there.

Scott Searle -- ROTH Capital Partners -- Analyst

Gotcha. And if you could as well just restate the attach rates that you are talking about for device cloud, Ready-to-Connect, with other software and SaaS-based services, what was the target that you're driving to over the next three to five years?

Kent Thexton -- President and Chief Executive Officer

We didn't talk about attach rate targets. We said that IoT solutions today would look like 22% recurring revenue. And we'll look to continually grow that and, within the three-year to four-year cycle, mentioned we would be at 30% in growing recurring revenue. So that's the focus we have.

Attach rate is something that we'll speak to as we build more experience in that area.

Scott Searle -- ROTH Capital Partners -- Analyst

Gotcha. And just lastly if I could, your thoughts in terms of how big will LPWA be as you're exiting calendar '19, your thoughts on 3G sunsetting? And lastly, Kent, a lot of what you're talking about in terms of transforming the organization is really a larger investment in software, whether it's edge processing, it's some of the stuff that you're doing in Ready-to-Connect and otherwise in device-to-cloud strategies, right? So it's really a DNA shift, right, in terms of the organization. I'd just love to get a little bit more of your thoughts in terms of how you're approaching it and managing that, because it is a major shift in terms of where the organization has been in the past. Thank you.

Kent Thexton -- President and Chief Executive Officer

So I think that on the transformation of the business and the size of the LPWA market. So we look at all of the perspectives on LPWA, and it talks about shipping billions of devices. I mentioned hundreds of millions of LPWA devices. We're are seeing lots of appetite.

Again, I draw attention to the fact that today, about 70% of IoT projects fail because the challenge for the OEM or enterprise to be able to get that edge data in a usable fashion without a lot of complexity is difficult. So we have been making investments already. If you go to our website, you'll see a product called Octave, which is a very advanced edge processing and end-to-end solution. And it's solutions like that that we're accelerating.

And we're having tremendous response to that from customers and from partners. In terms of the investment in software, we have been building our cloud and software side of the business for some time, but we are working to accelerate that. With three discrete R&D divisions before, we were somewhat diluted in doing that. And under one centralized approach now, we are putting more emphasis in that area.

I think the DNA shift is as critical within our go-to-market side and being able to sell a complete solution to customers versus just hardware. And so I've done significant reorganization in our go-to-market resources to be able to have one global sales team with a strong incentive and training to help drive services and supported by our global solutions capability, to be able to go out there and make sure the customer is getting the best product and getting connected and that we're managing that ongoing connectivity. So it's been a work on both sides, both on the R&D and on the go-to market.

Dave McLennan -- Chief Financial Officer

And then, Scott, on your 3G sunset, we've already seen quite a substantial rolling off of 3G business It's down to about 14% of our technology mix at the end of last year. So yes, it will continue to decline. But I think we've seen the big trajectory behind us so far.

Scott Searle -- ROTH Capital Partners -- Analyst

Great, thank you.

Operator

Your next question is from Paul Steep with Scotia Capital. Your line is open.

Paul Steep -- Scotia Capital -- Analyst

Great. Thanks. David, can you just give us a sense of how we should think about that savings split out between either cost of goods sold and operating expenses? Thanks.

Dave McLennan -- Chief Financial Officer

Yes, Scott. At this point, think of it at the contribution margin line, and we'll continue to refine programs over both COGS and OPEX.

Paul Steep -- Scotia Capital -- Analyst

Thank you.

Operator

Your next question is from Todd Coupland with CIBC Markets. Your line is open.

Todd Coupland -- CIBC Markets -- Analyst

Hi. Good evening, everyone.

Dave McLennan -- Chief Financial Officer

Hi, Todd.

Todd Coupland -- CIBC Markets -- Analyst

I had one OPEX question and then a couple of follow ups. So if $56 million rising a little bit is baseline, once you get through the investment period, would you anticipate that that is actually going to fall? What materially, I guess, $10 million to $12 million a quarter would be the $40 million to $50 million. I guess some may go in COGS, but is that how you're thinking about it beyond 2019?

Dave McLennan -- Chief Financial Officer

Certainly, beyond 2019 is a big investment year for us, Todd. So you'll see OPEX rise. I think after that we can start to garner more of the savings to the bottom line, but not going to make a prediction as this point.

Kent Thexton -- President and Chief Executive Officer

Yes, and there's a strong emphasis on COGS reductions, as well as OPEX reduction. So on your quick math there, you need to take into account that some of those savings we're going after are in the COGS area. And then the rest in OPEX you'll see flowing through over the next 18 to 24 months to get the complete savings target we have into the numbers.

Todd Coupland -- CIBC Markets -- Analyst

And when you think about your base of modules that you ship a year, 20 million a year more or less, how much of that would you view to be -- I guess you can't really target in terms of recurring revenue potential. So what's really the baseline that you need to bring up to $40 million? How should we think about that?

Kent Thexton -- President and Chief Executive Officer

Well, if you look at the segmentation I mentioned of embedded broadband and IoT solutions, embedded broadband is a little less than half of our revenue today. And that's an area where it's difficult to drive attach to. Our IoT solutions is over half of our revenue, and that's where we're focusing our attach on. And we expect it to be the faster-growing part of our business.

Todd Coupland -- CIBC Markets -- Analyst

And then just lastly, I know it's early on your connect business, but what are some sort of real examples on some of the design wins that you like to call out? Give us a sense of $10-per-year payers of the product.

Kent Thexton -- President and Chief Executive Officer

Yes, I think there's quite a few segments that-- so when you say $10 per year, that would be slightly higher, and it's probably a LTE module segment. LPWA will bring revenue expectations down, more in the dollar type of range. I mentioned two examples in this. Our design win list that we have, and the customers that are in process with us is extensive but haven't cleared many of those to announce the names.

We've been making announcements most weeks about a new service connect customer, and we will continue to be doing so. Have some exciting customers to talk about and driving those solutions. And they're names that you recognize, but got to clear that with customers before I call them out.

Todd Coupland -- CIBC Markets -- Analyst

OK, great. Appreciate the color. Thanks a lot.

Operator

Your next question is from Paul Treiber with RBC Capital Markets. Your line is open.

Paul Treiber -- RBC Capital Markets -- Analyst

Thanks very much and good afternoon. Kent, when you were at the board and when you first took on the role, did you anticipate the magnitude of this transition or restructuring? Or was it something that you came across as you dug into the role?

Kent Thexton -- President and Chief Executive Officer

Hi, Paul. Well, I think that from November to now, there has been some significant weakening in PC OEM and automotive numbers for the year and described how those lead to a down year in that segment part of the market. The cost restructuring work we're doing, I think, is good business practice to get lean and efficient and work to drive money to the bottom line. The degree to which driving investment into succeed in the future part of this market has become more apparent as I said, talking to customers, suppliers and employees about how we're going to make the transformation happen.

So Jack Welch once talked about you need to eat today and dream tomorrow, and it's getting that balance right. We could have just cut costs and improved profitability and not be ready to win for this big market segment that's ahead. So I'm very excited about the IoT solutions opportunity. The IoT market is poised for its next leg of growth up, and we're very well-positioned to do that.

But we have to be strong. The question about the software shift but also our capability of selling and servicing customers. So from my perspective as CEO versus board member, it's more clear to me the exact components of the lift that we have to make happen. The revenue shortfall in the embedded broadband this year has made that all somewhat more challenging.

And so I wanted to lay out the vision here that we have a strong and growing IoT solutions business with strong gross margin today, a good top-line growth and improving recurring revenue. And so that is the part of the business that we're working to accelerate. And we think that, when you look in businesses that would be of that scale with that degree of recurring revenue, they're highly valued. And so that's the investment part.

We see a very strong building of shareholder value with that, and so the investment is being contemplated and reviewed extensively and done with that in mind.

Paul Treiber -- RBC Capital Markets -- Analyst

And then looking at the embedded broadband business. I mean, when you're speaking about mobile computing versus automotive, it felt like you would have prefer that the company prioritized mobile computing over automotive. Was that a fair characterization? And then more broadly, just what's your view on the automotive business longer term?

Kent Thexton -- President and Chief Executive Officer

So two questions there. I would rather have more revenue in 2019. So if that's an answer to the question, I'll leave it at that. You can't do everything, but I think that you have to work on prioritizing.

I've made quite a few changes to our overall sales force leadership and our ability to design and forecast. And I'm making sure that we're funding our roadmap so that we can be investing in the products that we think are going to be important to the market to grow our future revenues. So there was some decisions made that has -- it is going to result in some short-term revenue weakness in 2019 in the embedded side of the business. But we're absorbing that and moving on from that.

But I would rather not have a dip in PC OEM, but we're just laying out what's going on in the marketplace. And the dip I would add to has been -- the Intel shortage has really been a big moving part in terms of our volume as we look at what's going on in Q1 and to Q2. So it has been a meaningful impact that's lowered our expectations for revenue from that sector.

Paul Treiber -- RBC Capital Markets -- Analyst

And just on a longer-term question on automotive, how do you think about that business?

Kent Thexton -- President and Chief Executive Officer

So the key auto players are looking, and we're responding to their request for information about 5G in every car. And so we're working through those sorts of programs. So it's a segment that's going rapidly toward ubiquitous penetration of connectivity. So we're the leading global market-share player in that segment.

It's the good aspects of it are that they're typically five-year design awards. So we're able to look at the NPV from those auto awards. The nature of them is that they are generally, for us, low gross margin in the early period and increasing gross margin later as we have the opportunity with time and volume to reduce our component costs. So as we have some strong design wins starting to scale in 2019, that hurts our gross margin.

But it's not a business that we have to compete for every year. It's longer-term design cycles and, as I mentioned, $1.1 billion of revenue that we see coming from that automotive group. The next real design cycles will be around 5G, and that's driving capability and penetration in auto further. So I don't know if that answers your question of what I think about auto.

Paul Treiber -- RBC Capital Markets -- Analyst

Thanks for taking my questions.

Operator

Your next question comes from the line of Richard Tse from National Bank Financial. Your line is open.

Richard Tse -- National Bank Financial -- Analyst

Yes, thanks. Just two quick ones here for me, David, if you take out the guidance for Q1, the implied guidance for the remainder of the year, call it like $207 million on average per quarter, can you maybe sort of share with us the linearity of that ramp? That's, I think, sort of the highest we've seen on record for you at $207 million. So is that largely coming from VW here?

Dave McLennan -- Chief Financial Officer

That's certainly going to be a factor, Richard, starting next quarter where, I mean, to be clear, we are shipping now. But the big ramp is coming on in Q2. And then also in automotive, we've got a situation where some of our big customers are winding down their inventory. Some of them have year ends at March 31st, so they're being very careful with their ordering patterns.

And we expect that to recover in Q2 as well with the ramp. And then we've got ramping elsewhere in our business such as gateways, aspects of industrial IoT and the services business.

Richard Tse -- National Bank Financial -- Analyst

OK. And for Kent, I appreciate the comments around the investment. Should we consider that investment to be sort of all organically driven? Or are you contemplating acquisitions with that?

Kent Thexton -- President and Chief Executive Officer

No, that's all organic today. As I've mentioned previously, we don't see the need to buy in anymore MVNO or service capability. We believe we're at sufficient scale, and we'll grow that scale organically. Our differentiated market-leading solutions is an area that -- we have some of the best people in the world working on those, and we're continuing to expand in those areas.

So it's organic.

Richard Tse -- National Bank Financial -- Analyst

OK. Great. Thanks.

Operator

Your next question comes from the line of David Gearhart, First Analysis. Your line is open.

David Gearhart -- First Analysis -- Analyst

Hi. Good evening. Thank you for taking my question. Just really quick on the iTank sale as it relates to kind of a broader theme.

iTank was proprietary hardware with a proprietary application. So just wondering how you're thinking about owning the entire solution from modules, gateway, infrastructure platform, connectivity and application. Are you moving away from actually owning the application layer, and your thoughts there? And then also Numerex had a few other businesses, including the Offender monitor application. Just wondering if that is still being supported, going to be supported, or is it still being considered for potential divestiture as well?

Kent Thexton -- President and Chief Executive Officer

It's Kent here. Let me start by talking about the big market segments we're going after. So when we look at what we call the industrial IoT edge, so every piece of industrial equipment over $10,000 should be connected to the cloud. Some infrastructure, smart city and mobile IoT edge, every mobile asset of over $5,000 should be connected to the cloud.

So those three segments of the marketplace are broad. They will have some vertical aspects of it, but it can mostly be done in software. And those are the areas that we're putting our emphasis. Some markets like iTank were not large.

We weren't at scale in that business. As Dave mentioned, we were losing money in that area, and so we don't want to invest in that sort of discrete small growth area. We're investing into the big market segments and those growth areas. So no comment on other aspects of our business, I think, at this point in time, but that discipline is what we're trying to apply throughout.

David Gearhart -- First Analysis -- Analyst

OK. Thanks for the color.

Operator

And we have no further questions at this time. I'll now turn the call back over to the presenters.

Kent Thexton -- President and Chief Executive Officer

OK. Well, thank you very much to everybody. Dave, myself, Dave Climie here are available for follow-up calls and discussions. As I said, I'm very excited about the future opportunities in the business, look forward to that dialogue.

And we also are planning investor day meetings in North America and Europe after our results in May. So thank you very much, and we'll be speaking to many of you shortly.

Operator

[Operator signoff]

Duration: 65 minutes

Call Participants:

David Climie -- Vice President, Investor Relations

Dave McLennan -- Chief Financial Officer

Kent Thexton -- President and Chief Executive Officer

Mike Walkley -- Canaccord Genuity -- Analyst

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Steven Li -- Raymond James -- Analyst

Scott Searle -- ROTH Capital Partners -- Analyst

Paul Steep -- Scotia Capital -- Analyst

Todd Coupland -- CIBC Markets -- Analyst

Paul Treiber -- RBC Capital Markets -- Analyst

Richard Tse -- National Bank Financial -- Analyst

David Gearhart -- First Analysis -- Analyst

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