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Sierra Wireless Inc (SWIR) Q2 2019 Earnings Call Transcript

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Sierra Wireless Inc (NASDAQ: SWIR)
Q2 2019 Earnings Call
Jul 31, 2019, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, my name is, Sheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Wireless Second Quarter Earnings Conference Call. [Operator Instructions]. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. David Climie, you may begin your conference.

David Climie -- Investor Relations

Thank you and good afternoon, everybody. Thank you for joining today's conference call and webcast. On the call today is Kent Thexton, President and CEO and Dave McLennan, our Chief Financial Officer. As a reminder, today's presentation is being webcast and will be available on our website following the call. Today's agenda will be as follows. Dave will provide a detailed overview of our second quarter 2019 results. Ken will then provide his corporate update and then Dave will provide 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 two of the webcast and is now being displayed.

Today's presentation contains certain statements and information, that are not based on historical facts and constitute forward-looking statements within the meaning of applicable securities laws. These statements include our financial guidance. statements about our strategy, goals, objectives, and expectations and commentary regarding the outlook for our business. Our forward-looking statements are based on a number of material assumptions, including those listed on page two, 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 Annual Information Form and 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'll now turn the call over to Dave McLennan for his review of the second quarter results.

David McLennan -- Chief Financial Officer

Thank you, David and good afternoon, everyone. Note that we report our financial results in US dollars and on a US GAAP basis. We also present non-GAAP results to better provide an understanding of our operating performance. A full reconciliation between our GAAP and non-GAAP results is available on our website. Total revenue in the second quarter was $191.4 million, up 10.1% sequentially from Q1 2019 and down 5.2% on a year-over-year basis compared to Q2 2018. Overall, this level of revenue was in line with our expectations. Non-GAAP gross margin in Q2 was 30.8% compared to 31.5% in the prior quarter.

This was below our expectations, primarily as a result of a specific provision, we expensed related to a quality issue with an Asian automotive customer, which was resolved during the quarter. Our non-GAAP operating expense in Q2 was $55.6 million, up $700,000 from Q1 2019. This increase reflects some of the investments we are making as we transform to an IoT Solutions company and are partially offset by the realizations of savings from our cost reduction programs. The investments in Q2 were largely focused on go-to-market initiatives in sales and marketing. Our GAAP operating expenses in Q2 included a restructuring expense of $18.2 million associated with cost reduction initiatives. This included $14.9 million in severance related to the initiatives we announced in April. Adjusted EBITDA in the second quarter was $7.9 million compared to $4.5 million in Q1 of this year. Our non-GAAP earnings per share was $0.07, which was slightly above our expectations.

Looking at second quarter segmented revenue year-over-year, IoT Solutions revenue, which includes the former IoT Services and Enterprise Solutions business units as well as our broad based IoT modules was up $5.9 million or 6.3% year-over-year to $99.2 million, this reflects growth in AirLink gateways, and our managed connectivity business. The IoT Solutions segment was 52% of consolidated revenue in the second quarter. Embedded Broadband, which includes higher speed embedded cellular modules for automotive, mobile computing and enterprise networking was $92.2 million, down 15.1% year-over-year. This decline reflects expected weaker demand from our mobile computing and networking customers on a year-over-year basis. In addition, our automotive module sales were below our expectations, reflecting weaker industry wide global demand, combined with delays in the launch of new programs. The Embedded Broadband segment was 48% of consolidated revenue in Q2. As a result of this pressure in the Embedded Broadband segment, consolidated revenue was down 5.2% year-over-year to $191.4 million.

Looking at non-GAAP gross margin in Q2, total gross margin was $59 million or 30.8% in the second quarter compared to $69.4 million or 34.4% in the prior year. IOT Solutions gross margin was 37.2% in the second quarter, up 40 basis points from Q2 2018 reflecting stronger AirLink gateway margins. Embedded Broadband gross margin was 24% compared to 32.3% a year ago. This decline in year-over-year margin is driven by product mix as a result of lower mobile computing and networking module sales, which have higher margins and increased automotive sales, which have lower margins. In Q2, adjusted EBITDA was $7.9 million compared to $15.6 million a year ago and non-GAAP earnings per share in Q2 were $0.07 compared to non-GAAP EPS of $0.27 a year ago. Moving to the balance sheet, our cash balance increased $10.6 million in Q2 to end the quarter with an $85 million cash balance and no debt.

To improve the company's liquidity, as we work through our transformation program and incur substantial restructuring charges, we have entered into a receivable purchase agreement, which allows us to sell certain eligible receivables in order to collect cash sooner. At the end of Q2, we sold $16.5 million in receivables under this program. Including this program, cash flow from operations was $15.8 million. This combined with capital expenditures of $5.2 million resulted in free cash flow of $10.6 million.

With that, I will now turn the call over to Kent to provide a corporate update.

Kent Thexton -- President & Chief Executive Officer

Thanks, Dave. I'm pleased that we delivered solid earnings results in the second quarter. I'm also pleased to see that our transformation work is taking effect and we are building a strong funnel of customer solutions opportunities worldwide. Our fully integrated IoT Solutions are appreciated by our customers and are differentiating us in the marketplace. As we transform our business to become the global leaders in IoT Solutions, there are several data points that underpin our growing success in the marketplace. We have won more new recurring revenue lifetime value business year-to-date in 2019 than we did for the whole year of 2018, exceeding our targets. Secondly, we have more than doubled our recurring revenue pipeline from the beginning of 2019. And thirdly, we had strong subscriber growth in Q2 led by record activations of our Sierra Smart SIM product. Our Embedded Smart SIM technology is an integral part of our overall strategy.

We offer great benefits to our customers by simplifying SIM Logistics. Our Embedded SIM connects in over 200 countries and it eliminates the need for multiple carrier SIMs and certifications. We also provide unparalleled end-to-end security by virtue of having the device and connectivity layer and Sierra Wireless is the complete end-to-end partner with proactive device and network management and monitoring. Our ready to connect offering integrates all of these features into one solution. We've been working to build this out across our IoT Solutions product line. In Q2, we launched three new platforms with ready to connect capability. We are also making continued progress with our leading edge data orchestration platform called Octave. Octave simplifies the gathering and transmitting of edge sensor data and allows us to bill customers' per event instead of per megabyte. Octave solutions are in trials with customers now and we expect a full GA launch in October.

We've already signed up our first Octave design wins and receiving very positive feedback from the market. These value added IoT Solutions allow us to leverage our strong position in IoT devices and drive our recurring revenue business going forward. We announced at our Investor Day in early June, our new IoT collaboration with Microsoft. Sierra Wireless has been selected as a preferred edge partner with Microsoft Azure. We believe our collaboration creates a category of one IoT solution, allowing enterprise to monetize IOT deployments in a much simpler and faster way as well as leveraging the strong Microsoft sales team partner network and ensure enterprise penetration. I was at the Microsoft inspire partner conference two weeks ago and was very pleased with the progress that we are making as part of Microsoft's exclusive strategic partner program. Our Octave platform has been built on Azure and is integrated with Microsoft's IoT Central and our Octave product is the initial focus of the partnership. To help us grow this partnership with Microsoft and other key players in the IoT ecosystem, I've hired Jim Ryan as Senior Vice President of Strategic Partner growth.

Jim has more than 20 years of senior leadership experience building business within large carriers and early stage IoT environments. In order for Sierra to be able to deliver industry-leading IoT Solutions, I needed somebody with Jim's expertise to develop new partners in the areas of cloud, analytics and system integration. Jim has held senior leadership positions with AT&T and Sprint in the U.S. and O2 in Europe. So we're very pleased to have him join our executive team. I'm also pleased to report that in the second quarter, our recurring attach rate is improving on cellular gateways and routers, which is included in our IoT Solutions reporting segment. Our gateway business has been gaining market share, compounded annual growth rate or CAGR of 24% over the last three years.

While the market itself has been growing at a rate of approximately 20% and we expect to see continued successful growth in this business again this year. Our IoT Solutions business is demonstrating strong growth and we expect to see IoT Solutions revenue to grow more than 12% this year and accelerating. This is better than the 10% growth rate that I mentioned in February of this year. The growth in our IoT Solutions business along with our growing recurring revenue delivers an improved overall business model. As we presented at Investor Day, we are building toward a long-term business model of 15% adjusted EBITDA margins with better predictability. We are showing good early progress as we continue our transformation to become the dominant IoT solutions company. To invest in our transformation, we continue to make good progress in our companywide program 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 and OpEx savings and Dave McLennan, will be talking more about these in a few minutes. Our objective is to build a leading go-to-market team, more centralized R&D capabilities and improve our overall efficiency while at the same time invest in the business and advance to these cost savings.

We have been investing in strong go to market and service capabilities and have brought on some key talent in the last quarter. We are also investing in product, continuing to build our portfolio with Octave, LPWA and 5G. With our 5G cellular module development, we see significant near-term opportunities in enterprise related markets including our own high performance gateways and routers and we have already secured our first 5G design wins in the market. To be the leader in IoT Solution, we are investing in people, our global MVNO footprint, tools, software, training and operational processes.

As I mentioned at our Investor Day in early June, our goal is to double our recurring revenue to $200 million within the next three years and then double it again to $400 million in the ensuing two years. Overall, we expect to drive consolidated revenue to more than $1 billion in three years time with approximately 60% of that revenue coming from our higher margin IoT Solutions segment. This includes the $200 million of recurring revenue I mentioned. And that the IoT Solutions gross margins will be north of 40%. As we build our pipeline and customer wins in IoT Solutions, we are focusing on consolidated revenue of approximately $1.25 billion five years from now, of which 70% will be generated by the IoT Solutions revenue. Again this will be inclusive of the $400 million of recurring revenue that I mentioned.

There is a lag time between a customer solution design win and the recurring revenue starting to show up in our P&L, typically it take six months to 12 months before we are shipping product and another year before our customer deployment start to scale in the market. In addition to our strong focus on IoT Solutions design wins, we are working diligently on shortening up the time to revenue from these design wins. As we grow this part of the business, we expect to be a strong value creator for Sierra with higher gross margins, strong growth and valuable recurring revenue. And I believe , we are investing appropriately in the near term to achieve these goals to be the global leader in the end to end fully integrated IoT Solutions. All the while, we are maintaining a strong cost focus to produce ongoing profitability.

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

David McLennan -- Chief Financial Officer

Thanks, Kent. Before I review our guidance, I would like to provide a few comments regarding the progress we are making on the cost reduction initiatives we discussed last quarter. We continue to design in new programs and are on track to meet our target of reducing cost of sales and operating expenses by approximately $40 million to $50 million as we exit 2020. In addition to the initiatives we announced last quarter, covering consolidation of R&D and the associated reduction sites,as well as the transition of positions to lower-cost regions, including our new R&D site in Taiwan. The reorganization of our go-to-market approach by unifying the sales and support teams into one organization and the outsourcing of certain finance IT and HR activities, we are making further progress with additional initiatives in Q3.

Including the renegotiation of agreements with our contract manufacturing partners and additional cost savings from purchasing initiatives. This activity in Q3 is expected to produce additional annual run rate savings, once fully implemented of approximately $4 million. This is in addition to the $90 million, we identified last quarter, bringing the total annualized savings, once fully implemented to approximately $23 million. We are making good progress on our cost reduction program and as Kent mentioned, we are reinvesting a portion of these savings to drive growth of our high value solutions, product technologies and capabilities. In 2019, we are expecting to invest approximately $10 million in go-to-market technology and systems initiatives. Moving on to our full year 2019 guidance, during the first half of 2019, overall revenue was in line with our expectations.

This included declines in our lower margin Embedded Broadband segment, including the PC OEM and automotive product lines, compared to the second half of last year. This was slightly offset by growth in our higher margin IoT Solutions segment. In the second half of this year, we expect this trend to continue, more specifically, we expect our higher margin IoT Solutions business to accelerate and grow by 15% to 20% in the second half of 2019, as compared to the first half of 2018 and this is driven by broad-based growth in our enterprise solutions gateway business, continued growth in our IoT Services business and improvement in embedded IoT solutions.

We expect the stronger revenue performance in IoT Solutions to be dampened by continued headwinds in our lower margin Embedded Broadband segment, resulting in 5% to 10% lower revenue in this segment in the second half of this year as compared to the first half. This reduced outlook for the Embedded Broadband segment is driven primarily by a weaker industry wide global demand trend in automotive, combined with delays in the launch of some new high volume programs including Volkswagen platforms. Based on this revised outlook for the second half. Internally, we are modeling third quarter consolidated revenue to be approximately flat sequentially from Q2. Followed by an expected sequential improvement in Q4, as momentum continues to accelerate in IoT Solutions. In terms of the overall business health, the much stronger margins earned in the faster growing IoT Solutions business, allows us to still deliver our full year 2019 EBITDA and EPS guidance of approximately $35 million and $0.30 to $0.35 of earnings per share respectively. The increasing growth rate of our IoT Solutions business along with the strong design win and funnel metrics that Ken outlined, show that we are executing on our corporate transformation and are delivering a much improved longer-term business model.

With that, operator, we can now open the call for the Q&A session. Thank you.

Questions and Answers:

Operator

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

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Hi, good afternoon. Kent, if you could expand on the auto program delays in terms of the weakness in auto. I mean, help us understand how much was slower demand broadly versus the delayed program ramp and then do you currently have visibility in terms of when that program ramp should happen, should that get back on track. Later this year or early next or what's the outlook there?

Kent Thexton -- President & Chief Executive Officer

Sure, Thanos. Greetings. Kent here. So in the automotive, you will have read, number of industry stats, Nissan laying off 12,000 employees, producing product lines by 10%. Ford laying off 12,000 in an overall industry decline. So those less cars being produced mean, overall there's less demands for our product, but in particular with regards to Volkswagen, they have delayed rolling of some of their new product updates and part of it is the, we are seeing that the complexities, electronics and new auto platforms are causing some launch delays more universally for us with our big program with Volkswagen, that's pushed some of that revenue out that will, we had, expect to be ramping in the back half of 2019 and that's pushing into -- into early 2020, at this point in time, so that's from a overall value of the program, it's still intact. We are, our expectations of the significant volume from that program remain, but the timing has changed somewhat.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Okay, that's helpful. And for Dave, could you clarify the -- could you quantify the impact of the one-time provision that you mentioned with the Asian automotive customer.

David McLennan -- Chief Financial Officer

Yeah, it was approximately $1 million, Thanos and that was rectified during the quarter.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Okay. And then finally for Kent. Can you update us in terms of the sales force reorg, your consolidation of the three sales forces into one, where you stand on that, how the train is progressing and how about -- the timeframe for ramping that up.

Kent Thexton -- President & Chief Executive Officer

Yeah, what we have -- completed all the consolidation and I've just come from one of our sales conferences in Atlanta and back in Vancouver now. And yeah, I'm very pleased with what's going on with the front end of our business. As I mentioned, we've more than doubled our pipeline of service design wins, we've rolled out training to all of our sales force on our bundled solutions offerings, we've updated compensation plan till everyone's compensated on both hardware and recurring revenue and our sales force is excited about it. They're seeing, they're getting great response from customers and they're seeing that they can provide more value to customers by providing a complete bundled solution.

So that part is actively happening, I mentioned also the Microsoft partnership which I think is key and we talk about what's going on in the distribution side of the business as the largest enterprise cloud provider and being the preferred edge solution for that. We think that is going to be significant, they are focused on the Octave product. So that's our bundling of our modules seamlessly with connectivity, so that we can bill per event versus per megabyte and that's -- allows Microsoft to get more data individual by most effectively, efficiently and quickly helping their customers capture edge data. And so that's another part that is a key part of our distribution program and we'll be seeing more of that activity in 2020 as we launch, with general availability of our Octave product is in October of this year.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. I'll pass the line. Thanks.

Kent Thexton -- President & Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Todd Coupland of CIBC. Please go ahead. Your line is open.

Todd Coupland -- CIBC -- Analyst

Yeah, good evening. I was wondering, if you have a view on how long it will take work through the automotive headwinds, is it a quarter or two, or could it extend into 2020?

David McLennan -- Chief Financial Officer

Hi, Todd. It's Dave here. I -- definitely we'll be working through that in the second half of this year and that's why we provided that directional guidance for second half versus first half for that particular segment and that is driven by the automotive softness there. We do expect that the ramp will start in 2020 or will accelerate in 2020, as Kent said, these, some of the platforms are delayed. They're not canceled. So, a bit of a shift to the right and we would expect that that ramp to occur in starting in early 2020.

Kent Thexton -- President & Chief Executive Officer

And Todd, it's Kent here. Just to add to that -- I would -- would reemphasize that we've been seeing acceleration in our IoT Solutions business. So I had mentioned in February that we had expected Embedded Broadband to decline this year and IoT Solutions to grow by about 10% and now calling that greater than 12% this year and as Dave mentioned, the acceleration in the back half, and that will continue into 2020. So while auto has shifted out the key, what we see is the value driving part of our business is growing strongly ahead of schedule. And so as the auto part -- as those programs rollout and adds to our picture. We're pretty happy with the shape of things.

Todd Coupland -- CIBC -- Analyst

And the shifting in the platforms on automotive is it, is there a change in terms of use cases and and how the OEMs are thinking about deploying connectivity?

Kent Thexton -- President & Chief Executive Officer

No, not at all. I mean, in the case of Volkswagen, they have updated product lines that they have delayed the launch timing of those for many reasons that they have, but when they launch their new Passat and other product -- brand lines those coming with Sierra modules in them and that's been somewhat delayed.

David McLennan -- Chief Financial Officer

And I just want to be clear, Todd, on that. The delays are nothing to do with the products that we're putting into those vehicles. The reality is that these vehicles are becoming more and more complex with many other different electronics and that is causing some launch delays, but those are not, those are not driven by the products that we're supplying.

Todd Coupland -- CIBC -- Analyst

And sorry, just one more question on the details. So when we -- when you actually start to see it in the VW line whether it's Passat or whatever. Is that an option that the consumer needs to opt in for and pay for or will it be issued as a standard and then beyond, all those models when they...

Kent Thexton -- President & Chief Executive Officer

Yeah, it's comprehensive across the product line. So cars are being hooked into the network these days for predictive maintenance. We are being able to update systems within the car, they leverage our software system on the module to be able to manage upgrades within the vehicle, so instead of having to do a recall often they can do a software upload and so we're fundamental to those processes. So it goes across the whole product line. The question in our modeling is how many cars do they sell, but not, but it is in every car.

Todd Coupland -- CIBC -- Analyst

Okay. And then just the headwinds in mobile and networking, can you just talk about how you think that gets worked out and what your thoughts are on that. Thanks.

Kent Thexton -- President & Chief Executive Officer

Well, we talked previously about in the PC OEM business some of the activity that is going on and we've actually -- there has been no changes since our -- the expectations we set at that point in time so we've seen -- we are seeing some improvements in the Intel PC chip shipments to some of our PC customers so that slowly starting to alleviate. We had mentioned, we had a couple of design win cycles that we were out in the PC OEM business so that's -- that -- but our -- in the areas we're out with PC including some new 5G design wins are all moving along well so no change in our expectation there.

And the networking side has also been, it's been performing consistently. The only change versus our overall view we had is it auto, is going to be weaker in the second half than we projected, IoT Solutions is stronger than we had projected and offsetting some of that auto weakness, IoT Solutions comes in at a high gross margin and auto is quite low. So it's, that's why we're still giving guidance on our approximately $35 million in EBITDA is because we're seeing that greater production from our IoT Solutions part of the business. The auto volume will follow in 2020 and so that will add to our growing IoT Solutions at that point in time.

Todd Coupland -- CIBC -- Analyst

Great. Appreciate the color. Thanks a lot.

Operator

[Operator Instructions] The next question comes from Paul Treiber of RBC Capital Markets. Please go ahead. Your line is open.

Paul Treiber -- RBC Capital Markets -- Analyst

Thanks very much. I just in regards to one of your competitors specifically Huawei, have you seen, just given the global push back against the company, have you seen more OEMs looking to domestic providers like yourself, when they're doing RFPs for design wins ?

Kent Thexton -- President & Chief Executive Officer

Hi, Paul. It's Kent here, so we don't particularly compete against Huawei, they have been in some Chinese auto players, but not mainstream. So we haven't -- that hasn't changed that sort of competitive dynamic. In the embedded module business in other areas, we've started to see some questions but I wouldn't say, we've seen any change in behavior at this point in time. There is quite a bit of volume coming out of Chinese module makers these days and so certainly an area of interest. We -- in our, I would say, some of our more critical applications like the gateways we sell into, U.S. public safety, police, fire truck, ambulance with so -- it is more domestic competition into modules that might go into smart meters or PCs. I would say that there, we haven't seen as much concern at this point in time as to the country of origin of those products.

Paul Treiber -- RBC Capital Markets -- Analyst

Okay. In regards to IoT Solutions, specifically in terms of the services business, last quarter you did break out generally product versus services. I think, you're no longer doing that, how should we think about the recurring services growth relative -- year-over-year growth relative to last quarter?

David McLennan -- Chief Financial Officer

Hi, Paul, it's Dave here. Sure. And we will be putting that disclosure in our MD&A or in our financial statements when we file them, but if you cut the revenue on a product versus services base, the subscription services component in Q2 was $25 million and if you compare that to Q2 a year ago, it was up about 11.9% and that's adjusting for the iTank revenue a year ago that we sold that business at the end of '18. So we're seeing year-over-year growth in subscription services revenue of about 12% and also some very solid sequential growth as well.

Paul Treiber -- RBC Capital Markets -- Analyst

That's helpful to provide that. What -- what's driving that big increase on both the year-over-year and the sequential?

David McLennan -- Chief Financial Officer

It's accumulation of a lot of the activity that we've been focused on to really focus on driving subscription-based revenue. So it's many of the things that Kent talked about with respect to go to market initiatives and product initiatives.

Kent Thexton -- President & Chief Executive Officer

Yeah, Paul, as I said in my comments, we had record Smart SIM additions during Q2. We've had strong net subscriber growth over the year and I would say those trends are really at the -- our building momentum as we've just during Q2 rolled out training and compensation to all of our sales force around the comprehensive set of solutions that we have, also during Q2, we are working to build into our product our Ready-to-Connect. So that when our module ships, it has embedded in it, the Sierra global network technology and capability, and so we rolled three new product lines out with that in Q2. So we have more pre-integrated products that help us sell services overall, and that trend will continue throughout the year.

Paul Treiber -- RBC Capital Markets -- Analyst

Okay. Thanks for taking my questions.

Kent Thexton -- President & Chief Executive Officer

Thank you.

David McLennan -- Chief Financial Officer

Thanks.

Operator

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

Richard Tse -- National Bank Financial. -- Analyst

Yes, thank you. Next, on automotive, what verticals would you say that you're seeing the most momentum -- and I guess it was -- actually would apply to both the embedded and the IoT business, kind of curious to see what your thoughts on that are?

Kent Thexton -- President & Chief Executive Officer

Sure. Well, I think that -- it's Kent here. It's -- and good to talk to you, Richard. In Embedded Broadband areas like automotive and PC OEM. And those -- those product categories are not growing. Overall, the overall PC market is not expanding. The number of automobiles. We may have reached peak auto, so auto is expanding because we have some big design wins that are coming to market. The area where we see significant market opportunity and starting to see increasing growth is what we would broadly call industrial IoT. So that is the connecting of all industrial equipment so that its operating data, sensor data can be captured and reported through to the cloud for companies to be able to make money or save money. We've talked previously about Tribalee [Phonetic] industrial laundry machine, Atlas Copco industrial air compressors, we're into pumps, refrigeration systems, air-conditioning systems. All of those products are all going to be connected to the cloud. And we are at the forefront of enabling that and that is a total addressable market that we look at of about $10 billion, including Devices & Services.

So that's an area of significant focus for us. In the second segment, I would talk to is in the enterprise space. As I mentioned -- we see the enterprise market growing at about a 20% CAGR. We are growing faster than that. About a 25% CAGR and we are, we're seeing continued opportunities both in public sector, we have, we were the launch leader in the AT&T FirstNet products but also into the enterprise. So in smart grid applications and many other more robust enterprise requirements with -- with our more sophisticated gateway products and recurring software revenue, and recurring solutions revenue. So those are the key areas of growth that we are, we're seeing strongly happen.

Richard Tse -- National Bank Financial. -- Analyst

All right. And then going back to sort of the embedded business, clearly based on your comments, it doesn't seem like there is a huge opportunity going forward. When you came in and when you assess the business overall, was one of the considerations sort of paring off that segment because it doesn't really seem like it ties into this strategy that you have on the IoT side going forward here.

Kent Thexton -- President & Chief Executive Officer

We have insightful question. Took a hard look at all the businesses, we were in. And I think that we have a lot of synergies between the hardware we build for Embedded Broadband and the hardware that enables our solutions and our recurring revenue on IoT Solutions. So keeping both products and having that scale is important. We still see strong contribution margins going forward from our Embedded Broadband business and that allows us to continue to invest and grow our differentiated approach to IoT Solutions. Our market leading global MVNO capability and embedding that technology and investing in our go-to-market activities built for their own sales force and partnerships like Microsoft. So the Embedded Broadband side is not dramatically different from a hardware perspective, we're leveraging the similar technology stacks and capabilities, certification and network etc. that we do. And so having that overall strong volume across both of our sectors is helpful.

Richard Tse -- National Bank Financial. -- Analyst

Okay, that's great. Thank you.

Kent Thexton -- President & Chief Executive Officer

Thank you.

Operator

There are no further questions at this time, I will turn the call back over to Kent Thexton, CEO for closing remarks.

Kent Thexton -- President & Chief Executive Officer

Well, thank you everybody for our summer update call. I would just reiterate from my comments that we are -- since I've come on board. I have talked about our transformation to drive stronger recurring revenue. We talked at our Investor Day about growing our IoT Solutions and recurring revenue substantially. I think our Q2 results showed a lot of positive progress toward that and we will continue to update accordingly on that. Thanks for your attention. We look forward to follow-up questions and conversations with many of you. And with that, we'll close the call. Thank you.

David McLennan -- Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

David Climie -- Investor Relations

David McLennan -- Chief Financial Officer

Kent Thexton -- President & Chief Executive Officer

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Todd Coupland -- CIBC -- Analyst

Paul Treiber -- RBC Capital Markets -- Analyst

Richard Tse -- National Bank Financial. -- Analyst

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