Sierra Wireless (SW) Q2 2021 Earnings Call Transcript

Sierra Wireless (NASDAQ:SW) Q2 2021 earnings call dated Aug. 12, 2021

Corporate Participants:

David Climie — Vice President of Investor Relations

Phil Brace — President and Chief Executive Officer

Samuel Cochrane — Chief Financial Officer

Analysts:

Mike Walkley — Canaccord Genuity — Analyst

Anthony Stoss — Craig-Hallum — Analyst

Thanos Moschopoulos — BMO Capital Markets — Analyst

Scott Searle — Roth Capital — Analyst

Josh Nichols — B. Riley — Analyst

Derek Soderberg — Colliers Securities — Analyst

Paul Treiber — RBC Capital Markets — Analyst

Presentation:

Operator

Good day, and thank you for standing by. Welcome to the Sierra Wireless Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

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

David Climie — Vice President of Investor Relations

Thanks and good afternoon, everybody. Thank you for joining today’s conference call and webcast. On the call today are Phil Brace, President and CEO; and Sam Cochrane, our CFO. As a reminder, today’s presentation is being webcast and will be available on our website following the call.

Today’s agenda is as follows: Phil will provide his introductory comments and Sam will provide a detailed review of our second quarter results followed by Q&A. Before we get started, I’ll 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 securities laws.

These statements include our strategy, goals, objectives, 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 management’s current expectations and we caution investors of forward-looking statements, particularly those that are related 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 our longer discussion of our risk factors in the AIF and MD&A, which can be found on SEDAR and EDGAR as well as our 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 Phil for his corporate update.

Phil Brace — President and Chief Executive Officer

Thanks, David and thank you for everyone for joining us on the call today. We are pleased to report results for the second quarter of 2021. Total revenue in Q2 was $132.8 million, an increase of 19% compared to the same period of 2020. Revenue from IoT Solutions increased by 16% year-over-year to $90.3 million and revenue from Enterprise Solutions grew by 25% to $42.5 million. Revenue from connectivity, software and services increased 31% to $35.2 million reflecting our continued success with generating recurring revenue. Non-GAAP opex was flat sequentially from Q1 and down 13.6% from Q2 2020. Our adjusted EBITDA improved from negative $8.7 million in Q2 last year to positive $4.3 million in the second quarter.

Before I hand the call over to Sam to review the Q2 financials in more detail, I thought it’d be helpful to provide some background on why I joined Sierra Wireless and to discuss some of the actions that I’m driving in the short-term. For more than 25 years I’ve been working in high-tech across all areas in hardware, software and services. Most recently, I was the EVP of Field Operations at Veritas, a Carlyle owned private equity company. While at Veritas, I made significant changes, streamlining and improving operations in the integrated appliance business, software defined storage and finally all of the go-to-market activities leading to significant profitability improvements. Across multiple companies, including Intel, LSI, Seagate and Veritas, I have an established track record of business performance improvement across a range of industries.

When the opportunity at Sierra Wireless was presented to me, it was quickly apparent that there is much potential to be unlocked. The macro trends of IoT and 5G are accelerating and Sierra is well-positioned to capitalize on these trends. Sierra has a broad portfolio of leading wireless modules, gateways routers and a rapidly growing connectivity and solutions business that leads to a strong recurring revenue growth. The worldwide global pandemic has also accelerated the needs for our customers to be able to remotely connect and manage a wide range of devices in the field. And Sierra as the trusted Western IoT supplier is seen as a preferred partner with its global reach and coverage.

As the new President and CEO, I see myself as a steward of shareholder capital and I take that responsibility seriously. I recognize that investors have other places they can invest their money. You’ll find me to be direct, results oriented and with a clear focus on building a profitably growing business. In the past few weeks, I’ve been spending time meeting with as many customers, suppliers, partners, and employees as possible in both Vancouver and Atlanta. And while I expect to continue to do more of that going forward, my immediate short-term focus is on the operating performance of the business.

We are currently facing an unprecedented operating environment with the global impact of COVID-19 and a tight component supply chain. Our Tier 1 contract manufacturer who builds the significant majority of our cellular modules and gateways has our facility located in Vietnam, which has been impacted by an increase in COVID-19 cases in the last two months. This has led to widespread disruptions across the country significantly impacting our ability to manufacture and ship our products.

We are taking five immediate actions to mitigate the situation including; one, working with our contract manufacturer to subsidize the cost of isolation hotels for their workers with the goal of resuming full production as fast as possible. Number two, ramping up two additional manufacturing sites including one in Mexico to diversify our geographic production and increase our manufacturing resiliency. Number three, investing in parts and components to enable us to fulfill our customers’ orders as soon as possible. We are using our strong balance sheet to play offense. Number four, we are implementing strategic pricing increases to help offset some of the additional costs and investments, while balancing the need to remain competitive in the market. And number five, we are controlling our opex and capex spend in the second half of this year to ensure we are controlling what we can control. I already have Sam in the team working on those initiatives.

We do believe that the significant challenges we are experiencing in Q3 are temporary. Our demand remains very strong and I believe we are taking the right actions and initiatives to navigate through them. Orders that don’t ship in Q3, we expect to ship in the fourth quarter and in some cases in the Q1 of 2022, resulting in a solid recovery subject to COVID-19 externalities. Going forward, I will be focused on strategy, alignment, and execution along the prudent allocation of capital. I’m excited and humbled to be working with such a highly qualified and experienced Board of Directors to unlock the potential of Sierra Wireless.

Finally, I would like to thank our employees, our customers, and our suppliers as we collectively work through the COVID-19 interruptions and tightness in the supply chain. Together we will thrive.

With that, I will turn the call over to Sam for his review of the second quarter results.

Samuel Cochrane — Chief Financial Officer

Thank you, Phil. Good afternoon, everyone. Note that we report our financial results in U.S. dollars and on a U.S. GAAP basis. We also present non-GAAP results and provide a better understanding of our operating performance. A full reconciliation between our GAAP and non-GAAP results is available on our website. Total revenue in the second quarter was $132.8 million, up $21.1 million or 18.9% compared to Q2 2020. We were able to achieve higher than expected revenue in Q2 despite the tight supply chain as we secured additional parts during the quarter. Connectivity, software, and services revenue was $35.2 million in Q2, up $8.3 million or 30.8% year-over-year.

Non-GAAP gross margins in the second quarter was 34.9% similar to the prior quarter as higher component costs were offset by our higher-margin gateway sales as well as connectivity, software, and services revenue. Our non-GAAP operating expenses in Q2 were $46.4 million, down $7.3 million or 13.6% year-over-year. This reflects cost efficiency initiatives that we’ve been undertaking over the last 12 months. Sequentially, opex remained flat with the prior quarter. Our adjusted EBITDA was positive $4.3 million compared to an adjusted EBITDA of negative $8.7 million a year ago. The improvement in adjusted EBITDA reflects the year-over-year growth in gateway revenue and the increase in our higher margin connectivity, software, and service offerings as well as tight opex control.

Revenue in the IoT Solutions segment was up $12.7 million or 16.3% year-over-year. This increase is primarily due to growth in our hardware revenue and IoT connectivity business. As mentioned, we were able to purchase additional parts and components in the quarter that allowed us to build and ship products to our customers. Revenue in the Enterprise Solutions segment increased $8.4 million or 24.6% year-over-year. The increase was primarily due to improved sales and delivery of our gateways and routers despite tightness in manufacturing capacity and components.

Looking at non-GAAP gross profit in the second quarter compared to a year ago, total gross profit was $46.3 million or 34.9% in the second quarter compared to $41 million or 36.7% in Q2 2020. The improvement in gross profit dollars is primarily due to our growing connectivity, software and services revenue and improved gateway sales.

Moving to the balance sheet. We ended the second quarter 2021 with $118.5 million of cash. Cash flow from operations in Q2 was $15.3 million, which included approximately $20 million in factoring of receivables during the quarter. Capex in the second quarter was $6.5 million, which included purchases of 5G new test equipment and software licenses. As a result, free cash flow in Q2 was $8.8 million.

During the quarter, we continued our strategy of investing in inventory to secure the supply of components and we purchased $3.5 million worth of shares in the open market under our RSU program. As a result, our cash balance at the end of the second quarter was $118.5 million, an increase of $6.3 million sequentially. In Q3, our manufacturing capacity has been significantly reduced due to the COVID-19 related production interruptions in Vietnam. In turn, it is expected to have a significant impact on revenue, gross margin dollars, gross margin percentage, profit and cash. The impact to gross margin percentage is due to having less absorption of fixed costs spread across lower expected unit volumes as a result of the factory interruption in Vietnam.

The expected reduction in cash for the quarter is approximately $60 million due to our strategic investment in inventory to ensure a strong recovery from the production interruption and reduced AR factoring program arising from reduced sales. We expect this to be a one-time impact to Q3 related to the production interruptions in Vietnam and we expect to recover over the coming quarters, as working capital normalizes, as we increase production.

To minimize the impact on cash and profit, the company has delayed or canceled non-critical capital expenditures, significantly reduced travel expenses, delayed or canceled non-critical operating expenses, implemented a hiring freeze and reduced its marketing spend. The impact of the COVID-19 pandemic on our global business continues to remain uncertain.

While we continue to experience and evaluate the effects on our business, the overall severity and duration of adverse impacts related to COVID-19 on our business, financial condition, cash flows and operating results for 2021 and beyond cannot be reasonably estimated at this time. Demand for our products remain very strong. However, as we mentioned, we are experiencing production interruptions due to COVID-19 cases at a contract manufacturing facility in Vietnam. This is impacting our ability to build and ship cellular embedded modules and gateways to our customers in the third quarter of 2021.

While limited production has resumed at the Vietnam facility and we are currently building our resiliency by ramping up multiple locations including our New Mexico site for gateways and routers, the ongoing impact of these interruptions is highly uncertain. This is expected to have a material negative impact on our financial condition and results of operations, including production capacity, revenue, gross margin percentage, gross margin dollars, profit and cash in the third quarter of 2021.

Given these uncertain conditions, we will not be providing guidance for the third quarter of 2021. We believe we are taking appropriate steps to navigate through the impact of COVID-19 this quarter. We are benefiting from very strong customer demand and backlog for our products and solutions and believe the macro trends of IoT and 5G are accelerating. We are also using our strong balance sheet to strategically invest now, secure components and capacity to ensure a strong Q4 recovery coming out of the COVID-19 related production interruptions in Vietnam.

With that, I will now turn the call over to questions. Operator, please open the lines.

Questions and Answers:

Operator

[Operator Instructions] We have our first question from the line of Mike Walkley from Canaccord Genuity. Your line is now open.

Mike Walkley — Canaccord Genuity — Analyst

Great. Congratulations on the strong results given the tough supply environment. And Phil, congratulations to take over as CEO. I’ve heard good things about you from my industry friends.

Phil Brace — President and Chief Executive Officer

Thank you.

Mike Walkley — Canaccord Genuity — Analyst

But, Phil, most importantly, best wishes to your partners in Vietnam dealing with the COVID surge. While this is impacting your ability to meet the growing demand, the entire industry is struggling to meet demand. But can you help us just think, at all, the impact to Q3, while it’s obviously tough to predict, given the awful pandemic and what’s going on each week. But can you help us just think about the impact to Q3?

Phil Brace — President and Chief Executive Officer

Yes. Thanks for the opening remarks and thanks for the question. The impact of COVID-19 disruptions in Vietnam will be significant for us in Q3. The primary reason we can’t provide guidance is really related to the uncertainty around the pandemic and the continued potential disruptions. Our revenue in Q3 is really going to be highly dependent on our manufacturing capacity, output, how many products we can actually build, the availability of the components and to get them in and out of the country and then the ability — the mix of the products.

To give you a little more color, the disruptions started in early July and as a result, there has been very little — minimal output from the manufacturing side that produces the substantial majority of our products. The facility is located in Ho Chi Minh City, where along with other companies and other industries that are affected there. And it’s important to note that in addition to the manufacturing disruptions, we’ve also seen disruptions in things like logistics, shipping and customs. So that gives you a little bit of color. We’re working very closely with our contract manufacturer to ramp up their production as soon as we can and we’re aiming to get normal production levels back as soon as possible, obviously, subject to further COVID-19 outbreaks and component availability.

Our plan, our five-point plan we’re talking about is, working with our contract manufacturer to bring production back up as fast as we can, including isolating our workers as possible; ramping two additional facilities to increase our geographic resilience; continuing to invest in component supply to make sure that we can build the products and we can start manufacturing them again; implement strategic price increases to help make sure we can absorb and where possible pass along some of the cost increases we’re experiencing; and we’re controlling our expenses, including allocating every dollar we can to helping solve some of these production related issues and manufacturing constraints.

And I think, as David talked about, the thing we feel great about is demand remains incredibly strong. We are anticipating many of the orders to be able to be fulfilled in the next quarter and certainly in the subsequent quarters after that. And I do think it’s important to know, we are still seeing a fairly tight component supply chain that we have in front of us as well. So, hopefully, that gives you a little color in terms of where we are.

Mike Walkley — Canaccord Genuity — Analyst

That’s very helpful. And maybe just a follow-up. It sounds like you think the disruption could be under control by Q4. I know it’s hard to predict. But do you think you have any risk of losing share? I know the whole industry is supply constrained, but any risk in your customers having to go to other areas or any feedback you’ve had from the customers they are willing to wait for the issue to resolve?

Phil Brace — President and Chief Executive Officer

We’ve had — I think everybody in the industry is dealing with these things. In fact, many of them and all of the customers I’ve talked to, of course, they’ve been anxious to get as many parts as we can. We’ve been working to try and make sure we are satisfying their most critical needs as possible to make sure they don’t go into any sort of supply continuity problem of their own. And many of them have been very understanding, as they’ve been dealing with their own supply situations, not just from us, but other vendors as well. And so, I think, to the extent that we don’t see anything moving away, but obviously, if customers have multiple sources of supply, they’re going to look to that.

But, in general, the feedback I’ve had from customers is, they’ve been very understanding. They’re working with us collaboratively. We’re trying to do so in a transparent, straightforward manner and really trying to work collaboratively with customers. Many customers we’ve had for a long time, they’re kind of hard — were hard to replace. So we’re not seeing any movement along that area right now. But we’re just continuing to do day in and day out working with the customers.

Mike Walkley — Canaccord Genuity — Analyst

And last question for me and I’ll pass it on. Just as you look at the competitive environment in the cellular router and gateway business, Sierra has been a leader in this business for a while. A lot had change and you’re a new CEO. Greater point is now part of the big operation within Ericsson and Digi on their last earnings call, they just announced that they’ve hired a new industry veteran to try to change the leadership within their cellular router and gateway business. So how do you look at Sierra’s position in that business and once you get through the supply issues and maybe the longer-term growth drivers?

Phil Brace — President and Chief Executive Officer

Yes, it’s a great question. Obviously, whatever it’s three weeks, not even quite full three weeks yet. So I think it’s still early days for me, but I’ve been really impressed with that particular portion of the business. I think it’s got a great, very attractive market to be in that’s going to continue to grow. And I’m encouraged by some of the focus on the sub-segments, public safety and the like. I like the private radio bands that are happening there, tends to have higher software attach rates. So I generally like the business and going to be continue to focus on that. Of course, we have the 5G drivers there as well. We’ve got very strong product reviews for our 5G product and I think the customer reception to that has been great. So, I’m initially very positively inclined with that.

Mike Walkley — Canaccord Genuity — Analyst

Great. I’ll pass the line and best wishes to your partners in Vietnam.

Phil Brace — President and Chief Executive Officer

Thank you.

Operator

We have our next question from Anthony Stoss from Craig-Hallum. Your line is now open.

Anthony Stoss — Craig-Hallum — Analyst

Thank you. Phil, welcome aboard also. A couple of questions for you. I know you’re saying that the majority of our large portion of your production is done in the Vietnam facility. Can you give us a more approximation, is it 75% or higher? And also, if you are trying to bring up Mexico and other facility, have these facilities ever produced parts for you before? How long before they’re live? And then I had a couple of follow-ups after that.

Phil Brace — President and Chief Executive Officer

Yes, we’re not giving specific numbers [Indecipherable], suffice to say, the significant majority of our parts were built out of there. In answer to your question, the move to diversify our geographic base — manufacturing base actually was started before we’ve seen some of the latest disruptions. So some of this transition is well underway. One of the facilities has, in fact, built products for us before. And the second one, the new one, we are undergoing call now and have been working on that for quite some time, which is why we’re able to bring it up faster than you might think, so.

Anthony Stoss — Craig-Hallum — Analyst

Okay. Hypothetically, if you’re — I’m just going to make up a number $50 million of revenues getting impacted in Q3. How much of that impact would probably hit or you’d be able to ship in Q4 and additive or maybe give us a sense of kind of Q3 and Q4 combined, if you could?

Phil Brace — President and Chief Executive Officer

That’s a good question. It’s probably early for us to do that. I mean — and the reason is it’s just difficult to predict when we’re going to get back up to full capacity. I think our goal really is to be back up as close to we can in the fourth quarter and then start burning through some of the snow plow if you will of our orders. And then I think, frankly, we’re probably going to be back in a situation where we’re capacity constrained by component supply again. So, it’s a whack-a-mole situation right now. We’re just trying to deal with one situation at a time and try and fulfill as many orders as we can.

Anthony Stoss — Craig-Hallum — Analyst

Okay. I’m curious in terms of the inventory you do have in hand, how much of that will be able — for you guys to use in Q3 or are you still missing some raw materials that you’ve not been able to turn into finished goods in Q3?

Phil Brace — President and Chief Executive Officer

I’ll let Sam go into the specific details. But I would suggest with respect to inventory, I mean most of the inventory you’re going to see on the balance sheet that we’re accumulating, most of it is raw materials in terms of component supply. That’s the vast majority of it. We — obviously, we are in production in Vietnam. So we are continuing to burn through it. But the vast majority of the inventory build will be components.

Samuel Cochrane — Chief Financial Officer

Hi. Tony, it’s Sam here. Thanks for the question. So, yes, we’ll build up some inventory because our capacity is produced because of the COVID-19 related shutdowns and interruptions. But we’ll normalize that working capital over the coming quarters and bring that down. So that will be converted to cash over the next two or three quarters. There’s no new purchases etc., so ready to go to fulfil products for our customers.

Anthony Stoss — Craig-Hallum — Analyst

Got it. Good to hear your voice. I guess the last question for me is probably for both of you guys. Your order book or your visibility into 2022, I know this is a tough period, you’re reaching out to customers, give a sense of guys are giving you more visibility because of this into 2022? I’m curious your thoughts on your ability to produce everything that you get orders for in 2022?

Phil Brace — President and Chief Executive Officer

Yes, that’s a good question. I would say, in general, we have seen increased lead times. Our customers are giving us orders farther out in time. So, we have seen increased backlog for the outer quarters more than we’ve seen before. So, I would say customers are recognizing that. They’re starting to give us longer lead time orders. So, I would say the answer to your question is, yes, we’re starting to see more of that.

Anthony Stoss — Craig-Hallum — Analyst

Okay. Thanks for all the color. I’ll jump back in line. Thanks.

Phil Brace — President and Chief Executive Officer

Thank you.

Operator

We have our next question from Thanos Moschopoulos from BMO Capital Markets. Your line is now open.

Thanos Moschopoulos — BMO Capital Markets — Analyst

Hi, good afternoon and Phil welcome as well. Regarding — so when the recovery does happen, would you expect gross margins to, I guess, recover kind of in line with revenues as revenues pick up or might there be some kind of a lag there associated with some of the issues ramping up in your facilities and so forth?

Phil Brace — President and Chief Executive Officer

Yes, that’s a good question. I mean, I think as Sam mentioned, we are going to see gross margin impact as result of fixed cost amortization of smaller unit volume. I do expect to see that we would have a recovery in gross margins as we do ramp up. So I think the short answer to your question is yes. Whether there’s particular timing of that, it’s probably too early to tell. But I think the general answer to your question is yes. And furthermore, I comment that we are pursuing strategic price increases to help offset some of the incremental costs we are seeing. We should see some benefit of that in the Q4 period.

Thanos Moschopoulos — BMO Capital Markets — Analyst

And as far as the Q3 disruption, if you look at modules versus gateways, should the impact be sort of similar or is there some dynamic there recognizing that module and gateways, but are you prioritizing gateway shipments or the dynamic?

Phil Brace — President and Chief Executive Officer

No. I think we’re not — right now we are just trying to build every product we can and certainly, we have some strategic module customers who’ve been with us for a long time that we need to supply. We’re trying to build our own, you’re right, some of the gateways as well. So there’s no additional color we’re going to provide on that. I think it’s — it would be fair to say that the supply disruptions have been uniform across our product line.

Thanos Moschopoulos — BMO Capital Markets — Analyst

Okay. And then on the components and I guess maybe less relevant for Q3 since that’s not as much of a constraint. But over the past quarter, how has the situation evolved? Would you say is it relatively consistent or has the component constraints gotten any better or worse?

Phil Brace — President and Chief Executive Officer

Well, I don’t have the benefit of history, but I do have the benefit of lots of experience in this space. I mean, so it’s hard for me to say whether it’s worse than prior. I would probably say it would be relatively consistent from what I’ve seen. I haven’t seen anything dramatically worse or otherwise. I mean I think as you go through, I mean we are seeing tightness in supply across a wide range of components.

And even when you go down even into the subcomponents wafer supply 40 nanometer, 65 nanometer wafer supply, substrates are tight, packages are tight, memory is tight, just across the board we’re seeing tightness. There’s spot changes here and there, right? Sometimes we’ll pick up some more availability on certain parts or others. And right now, we’re certainly planning on a tight material supply chain to probably mid-2022 as our current planning horizon right now.

Samuel Cochrane — Chief Financial Officer

And one thing to remember we made that big investment in Q1 in part and that helped us generate a very strong Q2 and to really improve on Q1 and the Q2. For doing that same thing in Q3, now with the COVID related interruptions and making that some investment and plan on converting that to a stronger quarter as well. So the supply constraints are not consistent, but we’re getting ahead of it as best we can to get products to our customers.

Thanos Moschopoulos — BMO Capital Markets — Analyst

Great. Thanks. I’ll jump back in line.

Operator

We have our next question from the line of Scott Searle from Roth Capital. Your line is now open.

Scott Searle — Roth Capital — Analyst

Hey good afternoon. Thanks for taking my questions. Phil congratulations and welcome aboard. Nothing like starting a new role in the middle of a pandemic. Just — I think you’ve answered this couple of ways. But it sounds like the Vietnam disruption is uniform, it’s across the board. It sounds like it’s modules, it sounds like it’s gateways. I assume that extends as well in being able to feed the recurring revenue engine of growth if you will in terms of being able to supply modules into that and grow the cloud business going forward at least in the near term?

Phil Brace — President and Chief Executive Officer

Yes, that’s correct. I mean clearly the — as we ship less units, there’s less stuff to attach to. So I think it’s a fair assumption that we’ll have a corresponding effect on the recurring revenue growth.

Scott Searle — Roth Capital — Analyst

Got you. And to follow-up quickly the loss of share or in terms of the competitive landscape do you — are you seeing any loss of share during this environment in terms of not being able to supply product to some of your key customers near term?

Phil Brace — President and Chief Executive Officer

I don’t think we’re seeing — we’re not seeing it. Every conversation I have with the customers, we’re trying to work to fulfill their bare minimum demand and they’ve been very supportive, we’re working through that. Obviously, however, if they have multiple sources of supply, they’re going to exercise that. We haven’t seen that yet to date. And we’re just working with our customers to make sure that we try our best to do everything we can to share them with them where we are, to get their help where necessary and to give them as much supply as possible.

Scott Searle — Roth Capital — Analyst

Got you. And it sounds like you’re expecting normalization at some point maybe by the end of this year as we kind of work through this process. But I just want to clarify what normalization means? The second quarter results were a lot better than expected. In fact, when the first quarter results were reported, the expectation was that there was some demand being left on the table because of an inability to supply I think 15% plus upside. You guys have done a good job being able to service that in the second quarter and demand I think throughout the industry has really been off the charts and unprecedented at this point. Is that the base level in the June quarter that we should be thinking about both from a module and a gateway standpoint and to build on that going forward as kind of a normalized number? Or are there some onetime events in there and end-of-life sales or something like that?

Phil Brace — President and Chief Executive Officer

No. I mean, I’ll let Sam comment specifically. There were no — there was — what you saw in Q2 I think was a reflection of strong demand across all of our product lines and we were constrained by our component supply at that point. So, I would expect that trend to continue. There wasn’t any last time buys, onetime purchases any of that kind of stuff that I’m aware of that happened in that time. So, I would — we’re trying to carefully balance or obviously we’re bringing up as much manufacturing capacity as we can. But again, we’ll probably end up getting back in a component shortage situation, right, we’ll be tight on this component side probably through the first half of 2022.

Scott Searle — Roth Capital — Analyst

Okay. And lastly, if I could. And this is probably an unfair question given you’re about three weeks in. But looking at the gross margin profile, you’re kind of back into where — whether it was embedded or the historic module business, it looks like gross margins are somewhere in the mid-teens, certainly being impacted by incremental supply chain costs. Similarly on the recurring side of the business, gross margins in the 40% range. I’m wondering if you could give us some high-level thoughts in terms of where you think that could be as we look out in a more normalized environment 18 months? What are the targets? What are the goals? Again, I understand it’s probably not a fair question, but figured I throw it out there? Thank you.

Phil Brace — President and Chief Executive Officer

No, I appreciate you asking the question and you probably appreciate my answer better. I’m not going to give you a specific and I’d say it’s probably too premature for me to say that what it might be. But suffice to say that I think there’s lots of room for improvement with respect to our overall business model performance, whether it comes to cost efficacy, opex spending, pricing, there’s a lot of things that we’re going to be looking at to improve the business performance. I didn’t come here to keep this the same.

Scott Searle — Roth Capital — Analyst

Great. Thanks so much and welcome aboard.

Phil Brace — President and Chief Executive Officer

Thank you.

Operator

Next question is from the line of Josh Nichols from B. Riley. Your line is now open.

Josh Nichols — B. Riley — Analyst

Yes. Thanks for taking my question. Sorry, if I touched on something that was asked before, my line connection hasn’t been that great. But what percentage is the facility in Vietnam currently operating at? And how long until you’re able to pull back up at that facility and these two new ones until you’re at least say at where you were in like the 2Q quarter before the COVID impact?

Phil Brace — President and Chief Executive Officer

Well, we’re not — it’s somewhat variable. I mean, we’re — we have improved our output since earlier in July. So, we’re seeing we’re making good progress on that front and our current expectation is we’re kind of be back to what I’ll call normal manufacturing output in the fourth quarter sometime. And that includes ramping up new facilities, the new facilities I’ve talked about. So…

Josh Nichols — B. Riley — Analyst

And then the cash impact that you’re expecting in the third quarter for these like five initiatives right to help get things back up to speed on the manufacturing front, if you could kind of help frame that?

Phil Brace — President and Chief Executive Officer

Yeah. I think what Sam mentioned is, we expect the cash impact in Q3 to be about $60 million. I think that’s what you said Sam and I think that some of that is really due to our inability to factor the accounts receivables due to less products being shipped and then some of it is continued purchase of component inventory and things like that. We do expect that to normalize as obviously we turn that inventory into finished goods and sell it. So…

Josh Nichols — B. Riley — Analyst

Thanks. And then last question for me. I’m just curious about — you’ve been — introduced some 5G products, right that typically are higher margin. What are you seeing as far as the demand? Is that being pushed out a little bit more where people are just focused on getting anything whether that’d be your legacy products or not or how we should think about the 5G product cycle given the current supply constraints that we have?

Phil Brace — President and Chief Executive Officer

It’s — I don’t know whether we know enough to give you real good data on that particular question because we’ve got strong demand for all of our products frankly including some of the legacy products that people have in stuff that they’re not redesigning. But I would say that the 5G demand from what we can see continues to be very strong. We’re getting very strong feedback from our customers on the competitive positioning of our products and where we sit relative to that. So that continues to be good both in the gateway and router side as well as the module side. So I don’t see any sort of delay in the 5G ramp. And I think you’re still probably in the 2022, 2023 timeframe before you really start to see some major deployments there. But that’s kind of where we are.

Josh Nichols — B. Riley — Analyst

Thanks. I’ll hop back into queue.

Phil Brace — President and Chief Executive Officer

Thank you.

Operator

Next question is from the line of Derek Soderberg from Colliers Securities. Your line is now open.

Derek Soderberg — Colliers Securities — Analyst

Hey guys. Thanks for taking my questions. My congrats as well on the good quarter and to you Phil for joining the team. It looks like MRR is kind of flat quarter-over-quarter. Can you quantify at all or provide any color on attach rates of software, connectivity or both? How are those trending? And in the supply environment, Phil, are you guys prioritizing shipments I supposed in the areas that you can based on wins with services attached? Just how are you planning on allocating that hardware that you have?

Phil Brace — President and Chief Executive Officer

Yeah. So the first question I think you had was on kind of the MRR, monthly recurring revenue and kind of the — what’s happening with that. It’s still a little bit lumpy, really having to do with timing of when the product gets sold and shipped and stuff like that. We’ve actually grown it really nicely year-over-year and I’d expect that growth to continue from that side. So, I’m not particularly — there’s no particular thing in there that I’m very worried about. I do think that our connectivity is obviously attached mostly to our devices. So, less devices to ship, the less attach you’re going to get. So I think there’s some factor there. But with respect to what was reported in Q2, it’s just a little bit lumpy. It grew really nicely year-over-year. So that was fine.

And then your other question is on prioritization of our — of what we’re making and what we’re selling and are we biasing some stuff. Really, we are just trying our best to — we have an algorithm — we certainly have customers that need our newer modules that we’ve designed in that they can’t design them out. And we have a responsibility I think as a trusted supplier to help make sure that we do everything we can to get them there regardless of whether they’re higher or lower in our own margin profile.

And so I think we are just trying to take a very customer-oriented view about this and really trying to work through situations where we’re balancing. So, I don’t think we’re taking a particularly a lens on it that goes okay, right, if we apply more here or not. And I think frankly we’re just in such an unusual situation. We’re trying to take a customer-oriented view going back to the share perspective and we’re just trying to work through everything we can on a customer-by-customer basis.

Derek Soderberg — Colliers Securities — Analyst

Got it. And then your electric vehicle charging customer, now they’ve got this infrastructure build here in the U.S. It looks like the charging stations are sort of part of that, moving forward pretty quick. How are your conversations going with your EV customer? Any worry that you might lose share at all if this opportunity moves pretty quick? Any thoughts on that would be great.

Phil Brace — President and Chief Executive Officer

Yes. I think look the — that infrastructure bill that was passed. I think it has a number of areas that are really benefit us long-term. I mean you noted the EV charging, I think there was some in the electric grid there as well. A lot of the segments that we play in do really, really well. So, again, I don’t — with respect to share loss, we’re working with every customer we can and we’re just trying to ship all the products we can. We’re not aware of any share loss we have. But obviously that’s dependent on their own particular supply situation.

Derek Soderberg — Colliers Securities — Analyst

Great. Thanks.

Operator

We have our next question from the line of Paul Treiber from RBC Capital Markets. Your line is now open.

Paul Treiber — RBC Capital Markets — Analyst

Thanks very much and good afternoon. And say welcome aboard Phil. In terms of the disruption in production when you look at demand, what portion of demand is perishable? Like, in other words, I mean, do you expect to make-up the production shortfall in subsequent quarters or you can fill that demand in subsequent quarters?

Phil Brace — President and Chief Executive Officer

Yes. We’re not seeing any of the demand being perishable. We haven’t seen any order cancellations. We’ve been working to reschedule as much as we can from that side. So we don’t believe its perishable at this point. And we’ve been working to try and reschedule it and work with our customers to figure out their absolute critical needs and what we do. And frankly, I think they’re working through their own, every customer that I talk to that has their own — we are about one person they’re talking to in terms of other supply situations, right?

We are not — certainly not the only one that have supply situations even their own customer base, right? So I think they are playing the whack-a-mole game with their suppliers, just like we’re playing with our suppliers. So the short of it is, we don’t see it being perishable at this point. And our customers are giving us longer and longer lead time orders to help compensate for that, help give us visibility on what they expect.

Paul Treiber — RBC Capital Markets — Analyst

That’s a good point, Phil. On the cash impact of $60 million, you mentioned that should normalize? Like, should we expect all of that to normalize or is it really just — is this — do you see the cash impact as a timing — a change in the timing or is there some of that that’s permanently lost?

Samuel Cochrane — Chief Financial Officer

Hey, it’s Sam here. Let me give a bit of detail on that. So a part of it is AR factoring and unwinding. I said we did about $20 million this quarter. We’re going to have trouble maintaining that with less unit volume, especially in the geographies where we can factor the U.S. mainly. Part of that’s going to be the strategic investment in inventory for a strong recovery, which we’ve talked about. Those two things will reverse and normalize overtime. Now, the decrease in operating performance that will be a one-time hit to the cash balance, but the majority of it is working capital and will normalize overtime.

Paul Treiber — RBC Capital Markets — Analyst

So should we think about it two-thirds or one-third?

Samuel Cochrane — Chief Financial Officer

I’m not going to get too exact, but 60/40, two-thirds, one-third. It’s a fluid situation and it’s an estimate. But I think you have enough information to get your model going.

Paul Treiber — RBC Capital Markets — Analyst

Okay. That’s helpful. And then just last one, Phil you mentioned, when you’re looking at the operations that you said you didn’t [Indecipherable], I think you said unchanged. At a high-level view, what’s your view on the company’s strategy? What’s the product lines the company has, the services business, what’s your thought on the synergies between them and maybe areas where there may not be synergies between them?

Phil Brace — President and Chief Executive Officer

Yes. Its early days on that. So I would say, look, what am I excited about, right? I think that the macro trends of 5G and IoT and I particularly like the position in cellular I think those are all very good things. Modules, enterprise and the services that go above that, I think are also a powerful drivers for us. Obviously, we have some other businesses. I mean, frankly right now, I’m focused on the major situation right in front of me.

Obviously, we have some other smaller businesses that I’ll take a look from time-to-time and see. I mean, right now there’s not an area where I’m spending a lot of time on just to be honest with you. And so I think that I’m just focused on kind of the main business at hand. But as it goes forward, I think we’ve got lots of different strategic options and we’ll be looking at how we grow shareholder value with all elements of what we have.

Paul Treiber — RBC Capital Markets — Analyst

Okay, great. Thanks for taking my questions.

Operator

No further questions at this time. I turn the call back over to you presenters.

Phil Brace — President and Chief Executive Officer

Thank you Mae and thanks everybody for coming and joining us on the second quarter earnings conference call. Certainly check our website for all our additional materials. Our PowerPoint presentation, our earnings release. And we’re available, please e-mail or call us at anytime. So thank you. And operator, you can now terminate the call. Thanks.

Operator

[Operator Closing Remarks]