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Sierra Wireless Inc (NASDAQ:SWIR)
Q1 2019 Earnings Call
May. 9, 2019, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon ladies and gentlemen, my name is Julie, and I will be your conference operator today. I would like to welcome everyone to the Sierra Wireless First Quarter Earnings Report Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions)

And with that, I would now like to turn the call over to David Climie, Vice President of Investor Relations at Sierra Wireless. Please go ahead.

David Climie -- Vice President, Investor Relations

Thanks, Julie. Good afternoon, everybody. Thank you for joining today's conference call and webcast. On the call today is Kent Thexton, President and CEO; and Dave McLennan, our Chief Financial Officer.

As a reminder, today's presentation is being webcast and will be available on our website following the call. Today's agenda will be as follows, Dave will provide a detailed overview of our first quarter 2019 results. Kent will then provide his corporate update and then Dave will provide his comments on full year guidance followed by Q&A.

Before we get started, I will reference the company's cautionary note regarding forward-looking statements. A summary of our cautionary note can be found on Page 2 of the webcast and is now being displayed. Today's presentation contains certain statements and information that are not based on historical facts and constitute forward-looking statements within the meaning of applicable securities laws and these statements include our financial guidance, statements about our strategy, goals, and 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 expectation 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 in our forward-looking statements.

I draw your attention to a longer discussion of our risk factors in our AIF and Management Discussion and Analysis, which can be found on SEDAR and EDGAR, as well as other regulatory filings. Presentation should also be viewed in conjunction with our quarterly earnings release.

With that, I'll now turn the call over to Dave McLennan for his review of the Q1 results.

David McLennan -- Chief Financial Officer

Thanks, David, and good afternoon, everyone. Note that we report our financial results in US dollars and on a US 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.

Moving to results for the first quarter. Total revenue in Q1 2019 was $173.8 million, which was at the high-end of our revenue guidance range for the first quarter. Product revenue, which includes all revenues associated with the sale of embedded modules, gateways, routers, and other hardware devices was $151.1 million in Q1, down 7.3% on a year-over-year basis, as we experienced weaker demand from our mobile computing and networking customers. This was as expected. Our services and other revenue which includes revenue associated with our cloud, cellular connectivity services, as well as engineering support and warranty services was $22.7 million, down 5.2% from Q1 2018. The year-over-year comparison was negatively affected by the fact that services revenue in Q1 of '18 included approximately $500,000 of revenue from the iTank monitoring business, which we sold in December of 2018, as well as some non-recurring engineering fees. Excluding these items from the first quarter of 2018, our service revenue was up slightly from a year ago. As a percentage of total revenue in the first quarter of '19, services was 13.1%.

Non-GAAP gross margin in Q1 was 31.5% compared to 32.7% in Q4 of '18. This is in line with our guidance and the sequential decrease was due to unfavorable product and customer mix in embedded modules, partially offset by sales of higher margin gateways and routers.

Our non-GAAP operating expense in Q1 was $54.8 million, down $874,000 from Q4 '18. While we typically have seasonal higher sales and marketing costs in Q1, driven by major trade conferences and training events, we continue to show solid overall cost control in the quarter. Our GAAP earnings in the first quarter this year included restructuring costs of $1.4 million associated with our cost reduction initiatives and transformation to a device to cloud IoT solutions company. Adjusted EBITDA in the first quarter was $4.5 million, which was above the high-end of our guidance range of $2 million to $4 million and non-GAAP loss per share was $0.02, also at the high-end of our guidance range.

With the reorganization of our business and as we transformed to a device to cloud IoT solutions company, we have changed our reporting segments to align with our new organization. We have moved to two reporting segments and are reporting revenue and gross margin for each new segment. Firstly, our new IoT Solutions segment includes our previous IoT services business, our enterprise solutions gateways and router business, and our broad-based IoT module business. We have grouped these businesses together in this segment because they provide us the opportunity to enable our customers with a fully integrated end-to-end IoT solution that includes hardware, connectivity services, and cloud-based management. In Q1 of '19, the IoT Solutions segment reported $94.3 million in revenue, of which 24% or $22.7 million was services revenue.

Our second reporting segment is Embedded Broadband, which is comprised of our high speed cellular modules that are primarily used in automotive, mobile computing and networking markets. Product sales in these markets do not present the opportunity for us to provide our connectivity or cloud-based services and generally have lower gross margins. These are valuable markets for us that drive overall unit volume growth, cash flow and allow us to leverage our technology. We have a strong customer base in the Embedded Broadband markets that will be transitioning to newer technologies like 5G over time. In Q1 '19, the embedded broadband segment reported $79.5 million in revenue.

We've adjusted our historical reporting to align with this new segmentation. Revenue in Q1 for the new IoT Solutions segment was up 5.4% year-over-year to $94.3 million, reflecting growth in our direct carrier and managed connectivity businesses, as well as AirLink gateways and IoT modules. Embedded Broadband revenue is $79.5 million in Q1, lower by 18.4%. This year-over-year decline was mainly driven by weaker demand from our mobile computing and networking customers as expected. As a result, consolidated revenue is down 7% year-over-year to $173.8 million.

Looking at non-GAAP gross margin in the first quarter, total gross margin was $54.7 million or 31.5% compared to $62.4 million or 33.4% in the prior year. IoT Solutions' gross margin was 36.6% in the first quarter, the same as Q1 2018, and Embedded Broadband gross margin was 25.4%, down from 30.4% a year ago as a result of lower mobile computing sales, which have higher margins and increased automotive sales which have lower margins. In Q1, adjusted EBITDA was $4.5 million compared to $9 million a year ago, and non-GAAP loss per share in Q1 was $0.02 compared to $0.09 a year ago.

Moving on to the balance sheet. We consumed $15 million of cash in the quarter to end the quarter with $74.1 million balance and no debt. The net loss from operations combined with working capital requirements, primarily to fund an increase in inventory, resulted in negative $10.6 million of cash flow from operations. This combined with capital expenditures of $4.4 million resulted in free cash flow of negative $15 million.

With that, I'd like to turn the call over to Kent for his comments on corporate and strategic initiatives. Kent?

Kent Thexton -- President and Chief Executive Officer

Thanks, Dave. I'm pleased we delivered strong results relative to our first quarter guidance. We're continuing to make good progress, as we leverage our market share leadership in modules and gateways to become the global leader in IoT Solutions. I reorganized our team and resources to drive recurring solutions revenue incrementally to our device revenue, and to attack the $10 billion total addressable market that is comprised of key industrial IoT segments. We're seeing strong customer opportunities worldwide and Sierra is in an enviable position in the IoT market with a highly differentiated device to cloud offering.

We're moving quickly to make the necessary investments to strengthen that position and accelerate the company's future. As I said, during our last conference call, we are targeting to reduce our cost structure by approximately $40 million to $50 million by the end of 2020. These cost reductions are expected to come from a combination of both cost of goods sold and operating expense savings.

I would now like to provide an update on the progress that we've made to-date on a series of programs and initiatives. Since November of last year, we've announced a series of cost reduction initiatives that will take effect through the end of this year as follows. In the fourth quarter, we announced the outsourcing of our return and repair activities and the transition of some operational staff to lower cost regions. We also started the process of centralizing our three R&D teams into a single design and development team and closed several smaller R&D centers.

In the first quarter this year, we reorganized our go-to-market approach by unifying the sales and marketing teams into one organization, delivering additional efficiencies. And last week, we launched a process to reduce the size of our development team in Paris, with the objective of consolidating more R&D work at our lower cost locations in Canada and Asia, including a new site in Taiwan.

Additionally, in our finance, IT and HR departments, we will be outsourcing certain administrative activities to achieve cost reductions and scalability. We are in the process of contracting with a Tier 1 outsourcing partner to provide services in this area. In summary, we're building a leaner and market leading R&D capability, as well as greater efficiency in cost of goods sold and G&A. Dave will be providing the financial details related to these initiatives later in this call.

At the same time, as the organizational changes have been occurring, we've been making focused investments in the business. These investments will enable us to drive growth in the high value solutions and product technologies. More specifically, we're investing in our 5G and LPWA roadmaps, embedded SIM technologies and our distributed data orchestration platform called Octave. We've invested in people, tools, software, training and operational processes. These are strategic investments to enhance our capabilities and provide leading edge integrated solutions that simplified the deployment of IoT for our customers.

And at the front end of the business, I now have our global sales organization led by Marc Osgoodby, promoted to be SVP of Global Sales. Marc joined our team from Honeywell about four years ago and he's been instrumental in doubling our enterprise network solutions revenue during that time. Marc is working very closely with myself, Marc Overton, our Chief Solutions Officer and Rene Link, our Chief Marketing Officer, as we accelerate our focus on IoT solution selling.

The reorganization of our go-to-market approach is designed to accelerate our leadership position in device to cloud solutions and increase the flywheel effect to drive our subscription based revenue. Every time we sell our device, be it modules or gateways, we are seeking to attach cloud and connectivity services to those devices.

As part of our solution focus, we are seeing good progress in our Ready-to-Connect or R2C Solution that has a Sierra cellular module that is pre integrated with our smart SIM and pre connected to global networks, supported by AirVantage IoT cloud platform. By removing the complexity around connectivity and SIM integration, our customers don't have to manage numerous vendor and platforms, simplifying their logistics with a secure solution that accelerates their time to market.

We're continuing to build our pipeline of design wins with our device to cloud and Ready-to-Connect Solutions. We will be talking more about our R2C Solutions at our Investor Day in early June. But in the first four months of this year, we have secured very good design wins in R2C with leading players in mobile asset tracking, industrial IoT, energy and health and safety. We have moved into mass production for our R2C devices and are now shipping our R2C enabled modules and gateways.

In LPWA, Low-Power Wide-Area, we are shipping some Cat-M1 and NB1 embedded modules to a number of leading smart metering companies and we're seeing a strong sales funnel building up for our LPWA products. In 5G, our embedded module development is progressing well and we are actively working with a series of major OEM customers and responding to their RFPs and questions.

I discussed last quarter that our targets three to four years lens, from now is to have revenue in excess of $1 billion with approximately 60% of that revenue coming from our IoT Solutions segment, and in that segment, gross profit margins north of 40%. We're focused on growing recurring revenues and our objective is to realize greater than 30% of our IoT solutions revenue to come from subscription based recurring revenue.

We expect this to be a strong value creator for Sierra with higher gross margins, good growth and valuable recurring revenues. And we're making good progress in laying the foundation to achieve these goals. We'll be spending more time during our Investor Day in June, going into more details on our differentiated IoT solutions offering, Ready-to-Connect, Octave and customer use cases.

So with that, I'll turn it back over to Dave McLennan for his comments regarding our cost reduction program and full year guidance.

David McLennan -- Chief Financial Officer

Thanks, Kent. Before I review our guidance, I'd like to provide a few comments regarding the progress on our cost reduction initiatives to-date, as we work toward reducing our cost structure in both cost of sales and operating expenses by approximately $40 million to $50 million by the end of 2020.

Just to summarize, since November of last year, we've announced a series of cost reduction issues that will take effect through to the end of this year. These include outsourcing of RMA activities and the transition of some operational staff to low cost regions, consolidation of our three R&D teams into one centralized team, with the objective of reducing in the number of R&D sites and moving programs to lower cost regions, including Canada, and a newly acquired site in Taiwan. This involves a significant reduction the number of R&D positions in certain of our locations, including positions in our Paris, France office, offset by the ramp up of R&D positions in lower cost regions.

Reorganization of our go-to-market approach by unifying the sales and support teams into one organization was another initiative we implemented this year. And the outsourcing of certain finance, IT and HR activities is also underway. In total, we expect these initiatives will impact approximately 225 positions worldwide, of which 99 are in France. For those positions in France, a process is currently under discussion with the Employees Workers Council.

In total, we estimate restructuring costs associated with these initiatives to be approximately $31 million, of which $2.2 million was expensed in Q4 of '18 and $1.3 million was expensed in Q1 of '19, leaving approximately $28 million to be expensed in the balance of this year. Due to the non-recurring nature of these expenses, we treat them as a non-GAAP expense. Once fully implemented, annualized run rate savings associated with these initiatives is expected to be approximately $19 million. We view this as a very good start to our cost reduction program, and puts us on track to realize our target of $40 million to $50 million of savings. And as Kent mentioned, we are reinvesting a portion of these savings to drive growth of our high value solutions, product technologies and capabilities.

Moving on to the update on guidance we provided in February for the full year of 2019, we expect revenue to be flat year-over-year and adjusted EBITDA to be approximately $35 million, both of which are unchanged from February. We expect non-GAAP earnings per share to be between $0.30 and $0.35 for the full year of 2019. This compares to our February estimate of approximate $0.30 and reflects the impact of the slightly lower than expected loss in Q1.

Also, as indicated in February, we expect non-GAAP gross margin for the year to be in the range of 31.5% to 32%. And as the company is making focused investments ahead of the full impact of our cost reduction initiatives, we expect our OpEx to increase throughout the year from the level reported in Q1. We also expect that our full year 2019 tax rate to be approximately 15%. This compares to our previous guidance of 12%.

Julie with that, that completes our prepared remarks and we can now open the lines for Q&A.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And your first question comes from Mike Walkley with Canaccord Genuity. Please go ahead. Your line is open.

Mike Walkley -- Canaccord Genuity -- Analyst

Hi. Thank you. Kent, just from Mobile World Congress and since you've been CEO, you seem to have met with lots of customers. Can you update us on feedback from them with your new strategy and elaborate on some examples of stronger IoT solutions, recurring revenue, attach rates to the module sales?

David McLennan -- Chief Financial Officer

Sure. Thanks, Mike. Yeah. Been out in the field a lot, meeting with customers and our distribution partners. And I'm highly encouraged, we see studies published that say 60% to 70% of IoT implementations fail and a lot of that is the challenge of getting devices at the edge to be programmed to receive appropriate sensor data, getting it to the cloud, and to get the business case benefit customers are looking for, being able to deliver our complete solution. So when they deploy our gateway or our module, it includes embedded connectivity, our cloud services and end-to-end security, allows them to get to market much more quickly. As we're building that demand and we're focused on design wins in those spaces, it takes some period for that to show through in results. So our design win progress is good and that helps us in our confidence of the continued move in the direction I talked about in terms of what we expect with growing our IoT solutions to north of 30% recurring revenue and increasing gross margins to above 40%. So that's underpinned with what we're hearing from customers. In terms of use cases and examples, I'll probably hold more specifics to our June 11 Investor Day meeting where we're going to talk with a number of real customer examples and having customers fully signed off on leveraging and sharing those business cases, but a lot of industrial IoT applications, we see that market segment as dramatically large. And it's where a lot of growth is happening in the IoT market today and as well as the customers we serve traditionally, it's larger growth areas available for us.

Mike Walkley -- Canaccord Genuity -- Analyst

All right. Thanks. And Dave, with the new business segments, IoT Solutions and Embedded Broadband, should we expect kind of steady gross margins for each division based on Q1 results? Or is there any mix or seasonality that maybe change gross margins from where they were in those divisions in Q1?

David McLennan -- Chief Financial Officer

From the IoT Solutions segment perspective, Mike, I would expect that the gross margins in that segment to improve over time, as the mix grows with, particularly with some of the higher margin products on the gateway side and the services and solutions side. So expect an improvement over time in gross margins there. On the Embedded Broadband side, I mean, we've seen, I'll call it, an adjustment in gross margins there and I would expect some stability in that business.

Mike Walkley -- Canaccord Genuity -- Analyst

Okay, thanks. That's helpful. And last question for me and I'll jump back into the queue, just for the Embedded Broadband business. Should we anticipate better growth once 5G comes? Or is there other things that maybe return to growth and given you're not currently shipping gigabit LTE products in that division? Thank you.

David McLennan -- Chief Financial Officer

Mike, it's Dave here. Yeah, I think 5G is an important initiative in the Embedded Broadband segment. We've got 5G under development now, we're making good progress with that and we're actively bidding on design wins with OEMs for that technology. So on the last call, we spoke about going through a winding down on some design wins with our mobile computing. But we have expectations that, going -- as we get into 2020 that we should see some rebound in that business, as we deploy 5G. And I would say the same for other parts at Embedded Broadband business.

Kent Thexton -- President and Chief Executive Officer

And Mike, it's Kent. I'll just add to that answer. I think that some segments within Embedded Broadband, so, computer sales are down globally. So they're not strong growth areas, but they're important market segments. In our LTE and LPWA IoT solutions area, there's lots of growth in those markets. I would just balance the market opportunities against those solutions as well.

Mike Walkley -- Canaccord Genuity -- Analyst

Great, Thanks for taking my questions and look forward to seeing you in June at your Analyst Day.

David McLennan -- Chief Financial Officer

Thank, Mike.

Operator

Next question comes from Thanos Moschopoulos from BMO. Please go ahead. Your line is open.

Bill -- BMO Capital Markets -- Analyst

Hey guys it's Bill stepping in for Thanos. Thanks for taking my questions. First off, historically, you provided guidance for the upcoming quarter. I see you didn't this time, is that because there's more uncertainty than usual with respect to how the upcoming quarter is shaping up? Or have you just made a decision to stop providing quarterly guidance going forward?

David McLennan -- Chief Financial Officer

Hi, Bill. It's Dave. We have not provided Q2 guidance. And I think, last quarter, we provided full year 2019 guidance and we've reaffirmed that just now with a little bit of adjustment to the EPS range. So I think our guidance philosophy has morphed a little bit here to focus on a full year context.

Bill -- BMO Capital Markets -- Analyst

Okay. Can you update us on the timing of the Volkswagen ramp? Are you thinking about it as a consistent ramp throughout the balance of the year or will there be like a step function upwards in the current quarter or next quarter?

David McLennan -- Chief Financial Officer

Bill, it's Dave again. It's happening now. But I think you should expect an acceleration of that in the second half.

Bill -- BMO Capital Markets -- Analyst

Okay. And about the $28 million in transition costs, how should we think about the timing of that will evolve in Q2, Q3 or farther out?

David McLennan -- Chief Financial Officer

Yeah. A good question. We have a process under way in France because of the initiatives announced last week, there's a significant portion of our employee base in our Paris office that's affected. So we have to go through a process with the Workers Council and the labor authorities. That will take some time. So I can't give you a precise answer, but I would expect it would, we would be incurring those expenses, if not late in Q2, possibly in Q3.

Kent Thexton -- President and Chief Executive Officer

And Bill, it's Kent. I'll just double click on your question about the quarterly guidance. There are, to be certain, it's not with regards to any concern about Q2 whatsoever. It's just, we announced last quarter and it's my intention to report annually and working to build a longer term growth business here and we think that's something that's the right context to providing updates on and we'll continue to work on an annual basis.

Bill -- BMO Capital Markets -- Analyst

Okay, great, that's helpful. I'll jump back in the queue. Thanks for taking my questions.

David McLennan -- Chief Financial Officer

Thank you, Bill.

Operator

Next question comes from Paul Streep from Scotia Capital. Please go ahead. Your line is open.

Paul Streep -- Scotia Capital Markets -- Analyst

Great thanks, Kent, could you maybe talk or -- and Dave, can you talk generally about how you're thinking about the portfolio at this point in terms of, we completed obviously the small divestiture, whether or not anything else sort of falls inside that lens and then equally, maybe on the opposite side, what you'd be looking to potentially acquire to further accelerate that IoT portfolio? And then one quick follow up.

Kent Thexton -- President and Chief Executive Officer

Sure. I think on the portfolio side, we're pretty comfortable with where we're at. The iTank business was subscale for us and wasn't an area that we chose to incrementally invest with the areas we want to focus on investing in our services business. We continued to be at good scale with our global MVNO business and that's an area that we'll continue to grow organically. In terms of opportunities for acquiring other businesses, I've said previously, we don't need more MVNO capacity. We're at scale already. We've talked about things like our Global NOC out of Atlanta, which we leveraged the scale and expertise from Numerex to build, and that's a very strong capability that our customers highly appreciate. The areas for growth we're looking at is recurring revenue. We have most of those capability and assets internally. We'll look at opportunities out there, but the growth in the IoT market and the opportunity to provide complete end to end solution, especially with the growth in number of Greenfield customers in industrial IoT that are coming to market gives us the opportunity to grow our recurring revenue in both services and software, substantially increasing the LTV of customer wins. And so we're pretty excited about that opportunity and don't need outside assets or expertise to complete that strategy.

Paul Streep -- Scotia Capital Markets -- Analyst

And then the follow up, Dave can you talk a little bit like obviously the inventory build has started here, how should we think about that in terms of sort of where we might hit a peak level obviously consumed bunch of cash in the quarter, when it sort of relates to Bill's earlier question on the automotive client ramp. Thanks.

David McLennan -- Chief Financial Officer

Right, yeah I think not surprisingly we did see a bump in inventory in Q1, as we reset the business in Q1 and you're now -- are now working through parts and components that were ordered the long lead items in late last year.So you know we're working through that, I would expect that inventory levels will come down here a little bit, as we work through that Q1 peak.

Paul Streep -- Scotia Capital Markets -- Analyst

Great, thank you.

Operator

Next question comes from Todd Coupland from CIBC. Please go ahead your line is open.

Todd Coupland -- CIBC World Markets -- Analyst

Yeah, good evening, everyone. Just a cleanup question if I could on, I mean, I think this is your version of IFRS 16. So Accounting Standard 842 lease accounting. Called out that you are going to be adopting that, but just wondering what was the impact in Q1 and what is that going to look like, as we think about the company going forward?

Kent Thexton -- President and Chief Executive Officer

Yeah, sure, I refer you to our -- to the balance sheet that was in the press release. So you'll see on the balance sheet, Todd, that we did adopt, we're US GAAP. But there's similar lease (ph) standard. You can see that we did adopt that as of January 1st. And you'll see a right to use asset on our balance sheet of about $27.5 million. And on the liability side, you'll see operating lease liabilities of about $25 million.

Todd Coupland -- CIBC World Markets -- Analyst

Okay. Does it impact EBITDA at all?

Kent Thexton -- President and Chief Executive Officer

No, it does not.

Todd Coupland -- CIBC World Markets -- Analyst

No impact on the EBITDA. Good. And then I was just wondering if, how should we think about sort of the rhythm of the growth rates of these two new segments. So as I think about IoT, probably, reasonably steady, 5-ish percent range, plus or minus, but given the mix of products you have and that those IoT solutions will evolve over time. But then when I think about mobile down a lot in Q1, but then auto moving up with some big programs second half of the year, probably not going to decline at a rate of 20% all year. So is there any way you can give us some color along those lines? Thanks very much.

Kent Thexton -- President and Chief Executive Officer

Sure, it's Kent here. Let me talk sort of beyond the lens of quarter-to-quarter, but in the three to four-year period that I talked about. So as we start to build in more of our full solutions design wins, I call that loading the flywheel. So customers that we're winning now and there may be a $10 or $20 per year recurring revenue, as that -- as those rollout over a period of time, you get the combination effect of that recurring revenue growing each year, as we add more of those customers. So a customer that we are, I use an example, a customer is buying 100,000 modules from us at $20 per unit, looks like a $2 million per year customer when it's hardware only. That number will likely decline somewhat as ASPs declined in time. When we're adding recurring revenue to that, and we're adding $2 million in recurring revenue to that account, what you'll see is in the first, you'll get half year effect. So you might see $1 million recurring revenue. In year two, that would grow to three and year three, that would grow to five. So you see this accelerating revenue and would have either (ph) been a relatively flat perspective from that initial customers. In IoT solutions, we expect to see an accelerating growth rate over time, as we start to get the benefits of that annual add of recurring revenue from customers that we won in previous periods.

And so that market is expanding. As we said, we have done a lot of work on the segments that we're going after, choosing market segments that we feel that are unique, highly differentiated market leading capability to provide this complete stack is, we're best positioned to win. So as we're expanding into those Greenfield opportunities, that's growth and then the flywheel effect on recurring revenue helps that growth. In the Embedded Broadband segment, we're going with two factors, the growth of those segments in particular and design win cycles. And so those are areas that have been previously lumpy for Sierra Wireless. And some of the declines that we saw in Q1 were reflective of some previous design win losses. We expect to continue to punch a decent market share in those segments, as we always have, but they become a less important part of our overall picture over time. So automotive is growing in PC where that's an overall static to declining market but will continue -- large market and will continue to participate and networking as well. So those are the dynamics. When I've talked previously about how we see value creation happening and we'll double click on this more at our Investor Day meeting, the 30% plus recurring revenue businesses trading the stock market at good revenue multiples and hardware only businesses trade substantially lower. So in the three to four-year time period, we would expect on the sum of the parts basis that our IoT solutions business would be circa 90% of our value creation and the Embedded Broadband, the balance. The volume, scale and cash flow contribution from Embedded Broadband is highly valuable. But in terms of creating shareholder value, the more predictable higher margin and strong growth opportunity in IoT solutions is very attractive.

Todd Coupland -- CIBC World Markets -- Analyst

Right. Thanks a lot, Kent. Appreciate the color.

Operator

Next question comes from Paul Treiber from RBC Capital Markets. Your line is open.

Paul Treiber -- RBC Capital Markets -- Analyst

Thanks very much, and good afternoon. Just want to clarify, on the severance costs to-date, so you announced $31 million in costs to date. The -- is that the total expected severance costs to achieve the $40 million to $50 million in annual savings?

David McLennan -- Chief Financial Officer

Yeah, let me clarify, Paul. So the $31 million refers to the initiatives that we've announced to-date. So it was, we started implementing things in November, again in January and then last week, we had a significant internal announcement regarding R&D and G&A outsourcing. So that $31 million covers those initiatives to-date, of which we've expensed about $3.5 million over Q4 and Q1, leaving another $28 million associated with those announced to-date initiatives to be expensed when they are implemented. So it will be between now and the end of the year.

Paul Treiber -- RBC Capital Markets -- Analyst

But the annual savings associated with that $31 million, is that the $40 million to $50 million or is that -- would that be a lower number?

David McLennan -- Chief Financial Officer

So the $19 million is your progress to-date toward the $40 million to $50 million. So those initiatives that we've been announced -- that we've announced internally since November, we estimate will provide when implemented, fully implemented $19 million of annualized savings. And that's a step towards the $40 million to $50 million that we've announced.

Kent Thexton -- President and Chief Executive Officer

And, Paul, it's Kent here. Just to contextualize it a little bit. As we -- we've exited some high cost centers like Paris, moving to a location where, for something that's approximately a third less cost per headcount, we're able to get similar quality and productivity. We're building a lean, global leading R&D capability and it's important to be in the right places in the world to do that. So the payback on the sort of the cost to exit some of these locations are expensive. It's something that probably should have been done in earlier periods. It's appropriately, we do it to build a lean capability globally to go out and win in these markets. So the payback on moves like that is in two to 2.5 year period. So although an expensive cost piece, it leaves us in much better shape to be able to execute and compete moving forward.

Paul Treiber -- RBC Capital Markets -- Analyst

Okay, understood. The -- I think in the past year or last quarter, you mentioned that the $40 million to $50 million in savings, you'd be reinvesting that back in the business. That's still the case?

Kent Thexton -- President and Chief Executive Officer

Well, what we said is we're going to be investing some of that back in the business. And I think that in the 2019 period, I've focused the company on some clear and discrete investments to enhance our ability to build and sell the IoT solutions. And so we will have some continued investment in 2020 as well. The savings that we get out are improve our cost structure going forward. And some of the investments are one-time and some of those are our areas of capability that will help build this higher revenue -- recurring revenue stream and is part of an improved overall business model. In June, we will talk in some more detail about how we see that business model improving in long term EBITDA perspectives. But we'll, with the time to give a more detailed presentation, we'll share that at that point, but that's where we're moving toward.

Paul Treiber -- RBC Capital Markets -- Analyst

Okay. Just shifting gears to automotive and as you look out to the second half of the year, the plans that you're getting from your customers in that space, are they fairly static and baked in or is there potential for some movement, up or down as we progress through the year?

Kent Thexton -- President and Chief Executive Officer

Well, in automotive, they tend to be long term contracts, multi-year contracts, and typically with a couple year of lead times from winning business to it getting enabled, so when we win a contract, we will typically have a 100% of that automakers commitment to IoT devices, most automakers are moving to having 100% of their vehicles equipped with an IoT module. So then we're not dealing with market share issues within that contract period, but the amount of cars that the automaker ships will vary. And that, along with inventory and builds or draws, can provide some degree of variance. So we know what the total picture looks like. We just don't know when they're going to take the volume and how successful they're going to be with their market share in the market.

Paul Treiber -- RBC Capital Markets -- Analyst

Okay. Thanks for taking my questions.

Kent Thexton -- President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) Your next question comes from Howard Smith from First Analysis. Please go ahead. Your line is open.

Howard Smith -- First Analysis Securities -- Analyst

Yes, thank you for taking my question. With your operations in a lot of different countries and shifting to a lot of different countries, I was hoping you could just review your thoughts on potential tariff issues with the news today in this week, et cetera. And just how you're thinking about that in your business and overall guidance?

David McLennan -- Chief Financial Officer

Sure. Hi, Howard. It's Dave. We undertook a program late in Q3 and into Q4 and Q1 to move production of our gateway business, which was previously done in China to Vietnam. And we've largely completed that. So we did have some tariff exposure in Q4, a little more, a little lighter in Q1 and going forward, I think our exposure on tariffs is very limited, if any in Q2 and going forward.

Howard Smith -- First Analysis Securities -- Analyst

Okay, great. And I'll just follow up, just more bigger picture competitively with the Ready-to-Connect or R2C product, how are you seeing just competitors react to that, when you're going after, maybe some of the same accounts, et cetera and highlighting that as a just a key differentiator as you compete for design wins?

Kent Thexton -- President and Chief Executive Officer

Sure. Howard, it's Kent here. And this is a question I enjoy answering. What we typically see is the customer is faced with choosing a standalone hardware, a module from us or from one of our competitors, then putting that together with carrier SIMs in all of the countries that they're going to be shipping their product into. Selecting some sort of platform management for device and SIM management, and then managing their own end-to-end security and then the opportunity that we provide that customer is that we'll put that all together, so that whatever country their product ships into, it automatically connects with our smart SIM to the carrier. In most countries we're connected to multiple carriers, so it'll connect to the best coverage. If you're putting a big piece of industrial equipment in a factory, that's powerful because you're always going to get the best signal with our smart SIM versus if you've contracted with one carrier in that market where in some areas, they are great, in some areas, they are weak. We also with our 24-hour, 365-day a year network operating center, are proactively managing all of our assets worldwide. And so if you're buying a device from somebody else there out of the picture after that sale happens in carriers across the world and you may be dealing with multiple of them, are more reactive if you call them and have a problem.

We can see if our devices because we have the network layer and the device we can see if our device is not reporting data. We can triage that, we can be in touch with carriers, if they're having a carrier issue or we can update software over there to our devices to deal with any instances that are out there. We also preload security settings into our device. And by having both the device and the network layer, we have two layers of security management that makes us unique in providing a superior solution in that regard. And then ultimately, when we get to our Octave solution, which is our most advanced solution, which we have out trials with customer right now and we'll be GA-ing later this year, we do what we call data orchestration. So when the customer is gathering the sensor data from their machine at the edge and looking to get that, that data to the cloud with a competitive solution, they're trying to manage embedded programming on the edge to get sensor data to the cloud, and will typically pull all the data and process it in the cloud. With our Octave product and our data orchestration. We provide that event management at the edge. So we do computation at the edge to just send the event data back to the cloud. So we're able to speed the time to market for customer because they don't need to do any programming on the edge. And we're shipping the relevant information. So we can be highly cost competitive or cost leading and still very high margin, because we're doing compression or computation at the edge and shipping the important data across.

So this has been years of R&D, we're taking advantage of our global market share leadership in device, we've acquired four global MVNOs, have taken years to integrate, we've built a global network operating center. So nobody else has that set of capabilities to provide that end-to-end solution. And now we're building the sales capability and marketing capability to go out and take advantage of the growth in the market with this opportunity. So it's put it together yourself with a series of products and solutions, or to do it end-to-end with Sierra Wireless and faster time to market, better security and substantially improved logistics, and being able to deploy across the world.

Howard Smith -- First Analysis Securities -- Analyst

Thank you. I appreciate all that color.

Operator

Next question comes from Andrew McGee from National Bank. Your line is open.

Andrew McGee -- National Bank Financial -- Analyst

Hi, guys. Thanks for taking my question. Just wanted to touch back on some of these recurring revenue solutions. And as you think about that, three to four years lens, how much of that recurring revenue is already being sold today and actually built versus how much is being developed?

Kent Thexton -- President and Chief Executive Officer

So I'll tell you how we're looking at that. So, as I said, the sales cycle a period of time from design win just showing up in our quarterly revenue is -- there's lengths to that. When we have a design win, it's often nine to 15 months from design win until the product is being integrated into the customer's machine, if I use that phrase and start shipping to market. And then as they start to ship that product, you have 12 months of shipment before you're at an annualized run rate on recurring revenue. So those are the -- that's the tracking of design wins is important to us because we see what's in the funnel. We know once we have design wins that are shipping with our end-to-end solution, in a predictable way what our future recurring revenue is going to be. So I have very clear design win targets for our teams across product areas of what we're working to do in 2019 to achieve our long term goals that I'm talking about. And so we're on track and we're continuing to work in building our funnel and investing in capabilities, like more advanced tools and diagnostics on customer analytics and funnel to make sure that we're leading edge there as we focus on those key indicators of growth for us.

Andrew McGee -- National Bank Financial -- Analyst

Thanks. And maybe just a follow up on that. So, maybe just to dig a little bit deeper, would you characterize as many of these solutions are actually completed in your R&D pipeline? Or do you believe that based on what you see in the customer pipeline that you're going to build the solutions over the next year or two and that's giving you the confidence in your targets?

David McLennan -- Chief Financial Officer

Okay, good question. I'll unpack from the technology first aspect versus the market first aspect. So I mentioned our Ready-to-Connect Solution. So that's an improvement in logistics and deployment for our customers and we have started shipping our modules and gateways of Ready-to-Connect. We're starting to scale that now so that more of our modules and devices are enabled with Ready-to-Connect. We started with our first modules in Europe in Q1. We started to broaden our portfolio. We will be throughout Q2 and have further increases in Ready-to-Connect deployment across our portfolio in Q3 and Q4. We have the ability to sell our stand-alone smart SIM product to connect with any of our devices now, but with Ready-to-Connect, where it's built in and again improves the logistics and the ability to connect more quickly in whatever country our customers product shows up in. Our Octave product that I mentioned is our most advanced version of a complete end-to-end solution. And that product is out to glowing customer reviews so far, and we'll be GA-ing that product later this year and be selling that both directly and with partners around the world. So in terms of our revenue pipeline, we have -- we're selling now products that we either already have or products that we have a delivery schedule against. And we'll continue to enhance those over time. But there's no assumptions of significant step function changes in what we need to deliver to achieve our goals. We have most of those products in either the early stages of deployment or fully deployed at this point in time.

Andrew McGee -- National Bank Financial -- Analyst

Okay. That's very helpful. And then just to kind of build on some of your pipeline data points, would you be able to characterize the size of the pipeline, maybe just even in an order of magnitude and how that might have expanded? As you currently see it today versus maybe what it was a couple of quarters ago when you started? Any thoughts around that would be very helpful, although it might be a bit early, I guess on the sales order (ph)?

Kent Thexton -- President and Chief Executive Officer

Yeah, we've said previously on key metrics like attach rates and things that are going to be indicative of our future growth that we're early and we don't want to start putting out numbers that have some degree of volatility to them. So we're on track with our targets, we're continuing to grow. I'm a huge believer in pipeline metrics and visibility. As I mentioned, in addition to what we're working with our sales teams on, building greater technology capabilities to get better views on that. So we'll talk to that in some level at our June 11 Analyst Day meeting, and we'll be building to have more comprehensive metrics that we can share, particularly around attach rates, et cetera as we move in to 2020.

Andrew McGee -- National Bank Financial -- Analyst

Okay. Well, thanks for answering my question.

Operator

We have now reached the end of our Q&A session. I will turn the call back over to Dave for closing comments.

David Climie -- Vice President, Investor Relations

Thanks, Julie. Well, thank you to everyone for your attention this afternoon. And as always, management is available for follow up calls, if you have any questions. Thank you very much.

Kent Thexton -- President and Chief Executive Officer

Yeah, thank you. We'll be -- it's Kent here. We'll be looking forward to your calls and looking forward to meeting many of you at June 11. And then we're doing follow on meetings in the UK later that week. So thank you very much.

Operator

This does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Duration: 52 minutes

Call participants:

David Climie -- Vice President, Investor Relations

David McLennan -- Chief Financial Officer

Kent Thexton -- President and Chief Executive Officer

Mike Walkley -- Canaccord Genuity -- Analyst

Bill -- BMO Capital Markets -- Analyst

Paul Streep -- Scotia Capital Markets -- Analyst

Todd Coupland -- CIBC World Markets -- Analyst

Paul Treiber -- RBC Capital Markets -- Analyst

Howard Smith -- First Analysis Securities -- Analyst

Andrew McGee -- National Bank Financial -- Analyst

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