Sierra Wireless (SW) Q1 2022 Earnings Call Transcript

Sierra Wireless (NASDAQ: SW) Q1 2022 earnings call dated May. 11, 2022

Corporate Participants:

David Climie — Vice President, Investor Relations & Corporate Development

Phil Brace — President and Chief Executive Officer

Samuel Cochrane — Chief Financial Officer

Analysts:

Anthony Stoss — Craig-Hallum — Analyst

Mike Walkley — Canaccord Genuity — Analyst

Thanos Moschopoulos — BMO Capital — Analyst

Josh Nichols — B. Riley — Analyst

Paul Treiber — RBC Capital — Analyst

Scott Searle — Roth Capital — Analyst

Presentation:

Operator

Thank you all for standing by, and welcome to the Sierra Wireless Q1 2022 Earnings Conference Call. Please note that all lines will be in listen-only mode until the question-and-answer session of today’s conference.

[Operator Instructions]

Please also note that today’s call is being recorded. I’ll now turn the call over to your host, David Climie. Sir, you may now begin.

David Climie — Vice President, Investor Relations & Corporate Development

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.

Before we get started, I will reference the company’s cautionary note regarding forward-looking statements. 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, 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 & 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 Phil for his quarterly update.

Phil Brace — President and Chief Executive Officer

Thanks, David, and thanks everyone for joining us on the call today.

We had a strong start to the year with total revenue of $173.0 million in the first quarter. Q1 revenue grew 60% year-over-year and 15% sequentially, well ahead of our guidance for the quarter. In the first quarter, we generated $8.6 million in adjusted earnings from continuing operations and $15.8 million in adjusted EBITDA, our most profitable quarter in more than three years. Our strong revenue and profit growth in Q1 were the result of solid customer demand, improved execution in manufacturing and operations, and our expanded product offerings, especially in 5G modules and routers, which are starting to ramp.

We are seeing continued momentum in key IoT markets, including industrial, enterprise, energy and first responder, as more companies are collecting business-critical data from the edge of the network. The COVID-19 pandemic has accelerated Industry 4.0 and customers are wanting to manage their equipment in the field to avoid costly downtime, monitor performance and do important preventative maintenance.

In Q1, our product revenue, which includes both modules and routers, was up 86% compared to last year. In modules, we had a strong increase in 4G shipments in the first quarter and our 5G devices are continuing to ramp. In Q1, we announced the availability of our next-gen 5G module, the EM92, which enables high-speed, low-latency connectivity for demanding industrial enterprise networking use cases. We’ve optimized the arc [Phonetic] design of this module, so it contains 68 bands for truly global coverage with just a single skew; and our low power wide-area modules are getting solid traction in areas including smart meters, public lighting and asset management.

In our AirLink business, sales of our rugged RV series routers improved year-over-year; and sequentially, we saw our 4G, 5G XR series shipping into key markets including utilities and first responders in higher volume. We are expecting the XR series to be our fastest ramping product line in our history, as these routers get certified on more global carrier networks, including the Emergency Services Network in the U.K. In the first quarter, we closed a number of new XR deals with major utilities and leading industrial manufacturers, and we continue to build on our leadership position on the public sector and first responder market with new state and county wins. We are especially proud that a growing number of police, fire, ambulance responders select AirLink routers for their ruggedness and reliability.

In our connectivity business, we are expanding our network access in Q1, partnered with Orange Wholesale to strengthen our European coverage and global reach. We also extended our partnership with T-Mobile in the U.S., to increase 5G and LPWA coverage in that market, and our APAC connectivity business continues to grow, especially in Australia and New Zealand.

I believe that we’re starting a decade of growth that is incredibly exciting for the wireless IoT industry. We’re just beginning a multi-year 5G rollout that will introduce new high-speed applications and accelerate machine learning and AI. Leading industrial enterprise customers are digitizing their assets, so they can collect data from their remote equipment, control endpoints and run important analytics. Many of these customers are looking for a trusted Western supplier that can provide them with both IoT devices and seamless two-way data connectivity. All these trends play right into Sierra’s strengths.

Before I turn the call over to Sam to provide more details on the first quarter, I’d like to provide an update on our manufacturing capacity and the current supply chain, and then I’ll make some brief comments on the sale of the Omnilink business.

Regarding manufacturing, we continue to ramp up capacity in Q1 in Mexico for production of routers and gateways. This will help us in Q2 as we build and ship more products, especially our newer RV and XR series routers. With multi factory production now in place, we have improved flexibility while keeping a sharp eye on costs and cost reduction opportunities.

Regarding the tight supply chain, our procurement team continues to do a great job with our partners and suppliers, and we’re using our strong balance sheet to continue to secure raw materials. We are continuing to secure orders from our customers for the out quarters and we expect the supply chain to remain tight throughout 2022 and into 2023, particularly for semiconductor components.

Regarding our offender monitoring business, on April 18, we announced that we signed and closed the sale of Omnilink to Sentinel Advantage for $37.6 million in cash, the equivalent of 2.9 times 2021 revenues. We continue to value Sentinel as an important and growing customer, and we’re providing them with our connectivity services and embedded modules going forward.

Regarding our home security monitoring business, we have reviewed our strategic options and decided not to adopt — develop additional products for this business, which has resulted in absolute inventory and impairment charge in the first quarter of this year. We are taking a very disciplined approach to our business portfolio and focusing our efforts and investment dollars, where there is highest value for our customers and the best return for our shareholders.

In summary, I would like to thank our employees, customers and suppliers once again, as we collectively worked through the challenges of tight global supply chain environment and the COVID-19 pandemic. We’re off to a good start in Q1, and we expect 2022 to be a robust year for Sierra Wireless.

With that, I will turn the call over to Sam for his comments on the first quarter.

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 to provide a better understanding of our operating performance. A full reconciliation between our GAAP and non-GAAP results is available on our website.

Total revenue in the first quarter was $173.0 million, an increase of 60.1%, compared to $108.1 million in the same period last year. Looking at our two reporting segments, IoT Solutions revenue was $133.7 million in Q1, up 79.3% year-over-year; Enterprise Solutions revenue was $39.2 million, an increase of 17.2% year-over-year. In the first quarter, product revenue grew by 85.6% year-over-year to $138.1 million; and connectivity, software and services revenue was higher by 3.7% to $34.9 million compared to Q1 of prior year. The increase in connectivity, software and services revenue included growth in our core connectivity area, including smart connectivity, which was partially offset by decreases in our legacy 2G, 3G European business and our home security business.

The improved performance in the first quarter was primarily the result of our investments in working capital to meet strong demand from our customers, improved sourcing of parts and components for our products, and the increased manufacturing capacity we brought on during the Q4 of last year. Revenue in the first quarter of 2021 was also negatively impacted by the previously-disclosed ransomware incident.

Gross profit in the first quarter was $55.1 million, up 46% year-over-year. Non-GAAP gross margin improved sequentially to 32.5% in Q1 compared to non-GAAP gross margin of 32.1% in the fourth quarter last year. On a GAAP basis, gross margin was 31.8% compared to 34.9% in the first quarter of last year, primarily due to the obsolete inventory in our home security business and expedited freight related to COVID shutdowns.

Non-GAAP operating expenses in the first quarter were $45.0 million, down $1.4 million compared to Q1 last year, and down sequentially. We will continue to manage our opex and capex tightly across all areas of the business.

In Q1, adjusted earnings from continued operations was $8.6 million, compared to a loss of $9.6 million in the first quarter of 2021 and $1.1 million in adjusted earnings in Q4. Adjusted EBITDA was $15.8 million, or 9.1% of revenue, compared to negative adjusted EBITDA of $4.4 million in Q1 last year and $7.3 million in adjusted EBITDA in Q4. So, it was good to see improvement in both year-over-year and sequential financial performance.

Moving to the balance sheet. We ended the first quarter of 2022 with $97.4 million of cash. Cash flow used in operations was $23.7 million in Q1, primarily due to our investments in inventories, including prepaid inventory advances. This investment has allowed us to both deliver strong results in Q1 and provide strong Q2 guidance. Capital spending in the first quarter was $3.1 million.

Regarding guidance for the second quarter, the impact of COVID-19 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 the remainder of 2022 and beyond cannot be reasonably estimated at this time.

As Phil mentioned, global demand for our products remains strong. Given this environment, we are guiding a revenue range in the second quarter of the year of $160 million to $175 million, with a midpoint of $167.5 million.

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

Questions and Answers:

Operator

Thank you, speakers. Participants, we will now begin the question-and-answer session.

[Operator Instructions]

Speakers, our first question is from the line of Anthony Stoss of Craig-Hallum. Your line is now open.

Anthony Stoss — Craig-Hallum — Analyst

Thank you. Hi, guys, congrats. Just awesome execution.

I know you’re guiding for the next quarter, but is it fair to think – based on your backlog or order book – that each quarter will be up sequentially throughout the year for routers? And also, either Phil or Sam, I would love to hear your thoughts kind of on gross margins for the remainder of the year? Then, I have one another follow up after that.

Phil Brace — President and Chief Executive Officer

Sure. Hi, Tony, this is Phil. I’ll take that kind of demand question. Sam, you can kind of comment on the gross margin question.

Yes, look, right now, I mean, the demand for our products is incredibly strong. Our backlog is far in excess of what we can ship. And right now, it’s really about just kind of getting the parts, optimizing the supply chain and getting things in place. So, we’re not really guiding for the second half of the year at this point and it remains — we’re just going to do one quarter a time. But, I think it’s fair to say that demand for the products are strong. And for us, right now, it’s just about execution quarter-on-quarter.

Samuel Cochrane — Chief Financial Officer

Yes, thanks Phil. And on the gross margin, I think I mentioned last quarter that we’re not providing guidance on gross margin. But, I didn’t say that we expect like small sequential improvements in gross margin. I think we’ve seen it here on a non-GAAP basis and I expect that to continue for the rest of the year.

Anthony Stoss — Craig-Hallum — Analyst

Okay. And then, Sam, just following up, what do you expect for opex for the June quarter? Is it kind of flattish, down a little after the sale of the business unit? I’m just curious, your thoughts on just where opex might be?

Samuel Cochrane — Chief Financial Officer

Yes, appreciate the question. I mean, opex, we can manage that pretty tightly. It’s down year-over-year, down sequentially. Going forward, we’ll continue to manage it tightly and it’s not going up – I’ll put it that way. So, I think that answers your question.

Anthony Stoss — Craig-Hallum — Analyst

Got it. And then, one last question for you, Phil. Just demand picture – are your customers willing to place orders even for next year just to guarantee supply? Also, if you’re going to get caught with additional component shortages, is it more likely in the module side of the business or the router side?

Phil Brace — President and Chief Executive Officer

Yes. So, there is two parts of your question – yes, we are seeing demand. Customers are placing orders into 2023 at this point, so — which gives us better visibility into the demand environment probably than we’ve ever had before.

In terms of component shortages, it’s a mixed bag. But, I will say just given the number of components, the enterprise product lines are tend to be a little more affected by that, just because we have more components in them and we tend to use some of the semiconductor components that tend to be more highly constrained. So, say, the enterprise business is more affected by the supply chain shortages than the modules at this point.

Anthony Stoss — Craig-Hallum — Analyst

Got it. That’s all my questions. Great job, guys. Thank you.

David Climie — Vice President, Investor Relations & Corporate Development

Thank you.

Operator

Your next question is from the line of Mike Walkley of Canaccord Genuity. Your line is now open.

Mike Walkley — Canaccord Genuity — Analyst

Guys, thanks. Phil, congratulations to you and the team on securing components.

I guess just trying to get a little more color on how you’re able to deliver upside in securing components, and so many of your competitors are continuing to struggle to procure supply to even meet their guidance. Credits to your team and maybe you can provide some color. And within that, what it might mean to near-term gross margins as you maybe expedite shipments to continue to outperform in the supply environment out there?

Phil Brace — President and Chief Executive Officer

Yes, thanks, Mike. I think one of the things that – to remind you – when we were back in the depths of the real challenges we had in the third quarter of last year, we kind of put a five-point action plan in place to kind of get ourselves out of it. And one of the points at that time was – look, we were using our balance sheet to play offense. We did — we continued to work closely with our key suppliers and continued to frankly place orders and work with them.

And you may remember, our working capital went up; the inventory went up. And we kind of did that to make sure that we are continuing to keep our supply lines intact because we knew and we put some plans in place to execute well. So, the performance that we achieved in Q1 was really the foundation laid by some of the investments and the actions we took kind of in the prior quarters to let us up to that. And continuingly, as we look forward, that remains to be seen.

We’ve also done I think — I’m proud of the team that did a good job, managing some of the challenges with respect to some of our — the COVID-19 impacts. Particularly in China, we’ve got multiple factories up and running now; that’s enabled us to be a little more resilient than we had been previously. So, it’s a combination of some decisions we made prior to play offense with our balance sheet, our solid execution and kind of having a multi-sided manufacturing strategy in place at this point.

Mike Walkley — Canaccord Genuity — Analyst

Okay. Just a follow up to that question, just on IoT solutions. The 30% gross margin – I haven’t seen a number like that in a long time. Was that mix or is that because of playing offense? You were able to pass on cost to your customers. And maybe you can discuss just the competitive environment in that area because it seems like you guys are once again outperforming your peers, maybe with telecom, private and some other changes in the dynamics. Is this 30% level sustainable going forward?

Phil Brace — President and Chief Executive Officer

Well, I mean, I guess, I would say that’s a multi — there is a multi-faceted answer, and Sam, you can kind of jump in as there are some specific [Indecipherable]. When we look at the gross margin performance, one of the factors is mix. We’ve certainly seen a good uptake at some of our higher end, higher performance modules, which was helpful. Scale also helps, right. We’re producing a lot more product now. So, we are able to kind of amortize them what cost we have. We’re able to amortize them over more volume. Our routers have been constrained a little bit. So, that kind of mix makes bit of an impact.

And with respect to price increases, we are in an inflationary environment and we have been working to pass some of our pricing along, keeping in mind we’re in a competitive environment, right. And I think the message that I’m giving to my team — and — we just got to work closely with our customers. Customers will remember how we behaved in this environment and we’re working really hard to make sure that we’re getting on the products we need, but also doing things that are right for our business as well. And the customers, I think, understand that. They’re dealing with the same situation themselves. So…

Mike Walkley — Canaccord Genuity — Analyst

Got you. That’s okay.

And last question from me and I’ll pass the line. Just on the disposition of the Omnilink business, what is the timing for that sale? And I think you threw out a metric, I missed – you spluttered the annual contribution. And what kind of impacts might it have to that division’s gross margins ahead, as it comes out? Thanks.

Phil Brace — President and Chief Executive Officer

Sam, you want to take that?

Samuel Cochrane — Chief Financial Officer

Yes, sure. So, I mean, it closed in April. So, there won’t be much in our Q2 numbers. The exciting part about this is that it’s not going to have an impact on our profitability, right. So, we get to have Sentinel as a valued customer, both in modules and connectivity, going forward. And therefore, no impact to our profitability in 2022, which I think is a very important point.

Now, of course, there will be an adjustment in our CS&S revenue. I think we disclosed $13 million or so in 2021 was the revenue. So, there will be a top line adjustment, but no impact on profitability.

And sorry, was there another question kind of in there?

Mike Walkley — Canaccord Genuity — Analyst

No, that was it. I was just looking looking for those metrics. So, I appreciate all…

Samuel Cochrane — Chief Financial Officer

Yes, yes. Okay, thanks. We’re really happy with it. That closed at three times revenue; good price; win-win for both parties.

Mike Walkley — Canaccord Genuity — Analyst

Got you, thanks.

Operator

Speakers, your next question is from the line of Thanos Moschopoulos of BMO Capital. Your line is now open.

Thanos Moschopoulos — BMO Capital — Analyst

Hi, good afternoon, all. I call the congrats on the strong execution in the quarter. Just following up on the Omnilink disposition – so that $13 million, should we think of that as being sort of the gross revenue and then some of that comes back in terms connectivity revenue?

Samuel Cochrane — Chief Financial Officer

Yes. If you think of the $13 million, that was our total recurring revenue piece. That’s the whole piece that was in the CS&S in 2021. And then, yes, we’ll get a portion of that revenue back in 2022 based on our connectivity agreement with Sentinel, with the buyer. And then, obviously, we’ll get some module revenue because they’re going to be a module customer as well. But, there will be an adjustment to the CS&S revenue, right. I mean, our connectivity revenue from Sentinel won’t be at those levels.

Thanos Moschopoulos — BMO Capital — Analyst

Right. Okay. Hey, Phil, I think I heard you say that Mexico is still ramping. So, as that continues to ramp, what might be the incremental benefits that we’ll see in subsequent quarters from getting Mexico ramping [Phonetic]?

Phil Brace — President and Chief Executive Officer

Well, look, I think we’ve assumed that we’ve got a certain level of ramp going into Q2 that’s reflected in our strong guidance. I mean, really, what — the biggest thing we’re trying to manage there is kind of a transition of products from our newer product — two of our newer products, which are the XR series 4G, 5G routers. We are trying to basically accelerate the movement there and ramp that up as fast as we can for two reasons. One – it’s a better product for us and for our customers. Second up – we have better visibility. And third – some of our older products, the MG and other series are tend to be very highly constrained.

So, I think the ramp up in Mexico is kind of included in our guidance and it really underneath the covers there. It’s around kind of migrating some of our — towards some of our newer products.

Thanos Moschopoulos — BMO Capital — Analyst

Great. From a working capital perspective, inventory went up $6 million sequentially, which isn’t all that guide at all, given the revenue uptick. So, how should we think about that kind of going forward – maybe a bit of a modest increase, or is it kind of hard to call just given the moving parts?

Samuel Cochrane — Chief Financial Officer

Yes, let me jump in there. So, when you look at inventory, you kind of also have to look at our prepaid. We kind of get a sense of them because some of it is prepaid in terms of how we work with our contract manufacturers. So, we did have an investment on working capital in the quarter, right. And that is again to basically invest in that higher revenue base; in that growing high revenue base, we made that investment.

Going forward, we expect our working capital to normalize at those higher revenue levels, and we don’t expect continuing to make investments in that level, right. I mean, it’s been made and we’re happy with that.

Thanos Moschopoulos — BMO Capital — Analyst

Okay. And then, finally on 5G and the ramp there. I think, typically, as new products ramp, there is a temporary impact on margins. I mean, it sets me to me to think about or in the grand scheme of things, material impact versus [Phonetic] takes the margin side?

Phil Brace — President and Chief Executive Officer

Yes, I’ll give you a high level answer.

Samuel Cochrane — Chief Financial Officer

Okay, go ahead.

Phil Brace — President and Chief Executive Officer

What do you think? No, you can comment.

Samuel Cochrane — Chief Financial Officer

Yes, sure. I mean, yes, it’s not really material, to be honest. It is sort of baked into the cake that what I talked about earlier, that we expect small sequential increases in gross margins going forward for all the reasons we’ve talked about: price increases, mix, recovery from 2021 COVID-related shutdowns, all those things, more volume and the scale. So, we do expect to have small sequential increase in the gross margin in the near term and that’s sort of baked into the cake – that small impact from new product releases.

Thanos Moschopoulos — BMO Capital — Analyst

Right. Thanks, guys. I’ll pass along.

Operator

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

Josh Nichols — B. Riley — Analyst

Yes, thanks for taking my question and great to see the type of execution here in the second quarter, where a lot of competitors have found it to be pretty challenging. Just — I wanted to ask if you could provide a little bit more detail, I mean, shift strength from the IoT Solutions business. Are there any particular pockets of strength regarding industries and end markets that are driving the growth mostly or is it spread fairly evenly across your end markets?

Phil Brace — President and Chief Executive Officer

That’s a good question. This is Phil. I mean, we’re seeing very strong uptake in our 4G products – I mean – particularly some of our products in smart meters, industrial lighting, asset control – very strong demand there. Some of our new 5G modules are also getting really good pickup in industrial networking and public safety environment there as well. So, our new products are getting great reviews from an IoT Solutions perspective. It’s really, I would say, very strong in industrial, smart meters, energy, oil and gas – those kind of markets – public safety, really very strong demand in there.

Josh Nichols — B. Riley — Analyst

That’s great. And then, just thinking about how things are likely to play out for the remainder of the year, the company is clearly invested heavily in the inventory balance over the last several quarters. And that’s paid off pretty well for the company. But, what’s the expectation going forward? Is that previous investment likely to become a significant source of cash flow; as it unwinds, the working capital improves, or is it likely to kind of maintain around these levels?

Phil Brace — President and Chief Executive Officer

Yes, I think, I’ll make some comments and then, Sam, you can comment.

Look, I think, Sam kind of mentioned, we do expect our inventory levels to kind of peak here in the first quarter. Sam commented the fact we made the investment in working capital and we are going to contain our expenses closely. So, it’s our expectation that we start to [Indecipherable] cash.

Sam, do you want to comment anymore?

Samuel Cochrane — Chief Financial Officer

Yes, I mean, listen, cash will be up in Q2, right. We have the divestiture of Omnilink, which obviously helps a lot, right. But, looking back, we chose to invest in working capital to support our higher revenue base, right. And on a free cash flow basis, we do expect that working capital to normalize at those higher levels. So, therefore, looking ahead, free cash flow into Q2, you can expect that to flatten out. And then, for sure, when you run it through the model, you’re going to be looking at positive in the second half of the year– so — just directionally. I hope that helps.

Josh Nichols — B. Riley — Analyst

Thanks, that’s good color. Then, just for like the revenue trajectory, I mean, the first half has been quite strong. And thinking about the second half, is there any — regarding seasonality trends or order flows that you’re getting, you have some stuff going into 2023? Is the second half expected to be kind of relatively comparable to the first half based on what you’re seeing on the backlog here, or up or down a bit?

Samuel Cochrane — Chief Financial Officer

I just think from a demand environment, it was so difficult to say what is “normal” and what is seasonal. And because — so, there is so much noise in the system with respect to the supply environments — and it’s not even just our supply, it’s our customers, right. So, even if they’re able to get stuff from us, so they are able to get the rest of what they need to put stuff into the market.

I think what we see and kind of what’s comprehended in our guidance is our backlog remains far in excess of what we’re able to ship. We are starting to secure orders into 2023. And we expect to remain supply constrained certainly throughout 2022 and probably into 2023 as well. That’s what we’re seeing right now.

Josh Nichols — B. Riley — Analyst

Great. That’s it from me. Thanks.

Samuel Cochrane — Chief Financial Officer

Thank you. Thank you.

Operator

Speakers, your next question is from the line of Paul Treiber of RBC Capital. Your line is now open.

Paul Treiber — RBC Capital — Analyst

Thanks so much and good afternoon. Congratulations on the quarter as well.

Just wanted to hone in a couple of comments — on — you made on COVID in China. You mentioned good job managing the COVID impact in China. Can you elaborate on that and exactly how you mitigated potential challenges there?

Phil Brace — President and Chief Executive Officer

Yes, sure. I mean, when we gave guidance, I mean both Suzhou and Shanghai have been affected by COVID in the past certain times. And us and our along with our manufacturing partners there, we were able to do a pretty good job of managing those situations. So, they didn’t impact the financial results. So, we were able to kind of move some stuff around. And frankly, our partner did a pretty good job of helping manage some of that as well. So, that’s about all I can say.

Paul Treiber — RBC Capital — Analyst

But, is that all execution within China? You weren’t moving it to your other facilities like Mexico or, I think, Vietnam?

Phil Brace — President and Chief Executive Officer

Most of what’s built in China these days is modules. And so, we kind of flexed back and forth between China and Vietnam.

Paul Treiber — RBC Capital — Analyst

Okay, thank you. And then, there was a comment in the prepared remarks just around COVID uncertainty in general for the remainder of the year – it makes it difficult to forecast. Is that fairly like a boilerplate comment or is there anything specific that concerns you that you may have picked up in your supply chain or elsewhere?

Samuel Cochrane — Chief Financial Officer

There is nothing unique. Yes, go ahead.

Phil Brace — President and Chief Executive Officer

There’s nothing unique to us. It is boilerplate in a way. But, I mean, the pandemic is ongoing. There are shutdowns in China. The supply chain is impacted and it continues to cause unforeseen things to happen like the shutdown in China in the first quarter when we were guiding, right. So, is that going to go away soon? We hope and there is good indication that that’s getting a lot better. But, I don’t think it’s time to remove that risk language yet.

Paul Treiber — RBC Capital — Analyst

And last one from me, you mentioned that order is going out to 2023. Can you put that into perspective in terms of, like, the lead times that you normally have? And then if — with these orders that are out so far, are you able to get additional commitments from your customers either contractually or other terms in those agreements?

Phil Brace — President and Chief Executive Officer

Yes, I mean, look, I think that it’s fair to say that this is probably the longest lead time that we’ve seen from our customers. I mean, certainly, goes back — I’m not a historian — but a long, long time; could be the longest. And some of it is, I think, just the new realization, the new world that customers recognize that they need to give us and give their other suppliers as well more visibility from that side.

And yes, in some cases, we are working through non-cancellable — non-cancellation kind of provision for some of those orders, particularly for orders that have very long lead time or unique components that are difficult to move around. So, the short answer is I think the visibility is probably as good as some of the best we’ve ever seen. And yes, in some cases, we are working through some special terms that give us some protection on the downside.

Paul Treiber — RBC Capital — Analyst

Okay, thanks for taking my questions.

Phil Brace — President and Chief Executive Officer

Thank you.

Operator

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

Scott Searle — Roth Capital — Analyst

Good afternoon, thanks for taking my questions. Absolutely phenomenal job on the quarter, guys.

Hey, Phil, maybe to just jump in on the services side of the equation. That’s one area where there hasn’t been a lot of growth. There has been some fixing that you need to do there. I was wondering if you could talk a little bit about what you’re doing on that front from a gross margin standpoint, from a pricing of a connectivity standpoint? And how we should be thinking about that business in terms of where gross margins can get to and what level of scale do you need for that segment to be profitable?

Phil Brace — President and Chief Executive Officer

Yes, lot of questions in there. So, let me try my best. So, I do want to do a few comments — if you just kind of look underneath at, I think I’ve talked about that. There are a number of sub-constituents in that portion of the business. The major big portion we’re focused on is, what I’ll call, our core connectivity business; this is Enhanced Carrier Connectivity and Smart Connectivity. Both of these businesses are continuing to grow. We’ve got some pockets of strength, certainly in APAC. And in other words, the gross of those businesses are growing.

We also have some other businesses that I’ll call them legacy businesses, non-core businesses. You saw that we divested one of them – the prisoner tracking business. We talked about the home security business that we’re starting to harvest. And frankly, I have probably got some more work to do in there. Gross margins from that point of view – look, I think there are some public compares out there and I think our goal is to kind of get near there. I mean, I think our goal is to get — should be in the ’50s for that kind of business.

Scott Searle — Roth Capital — Analyst

Okay, perfect. And maybe switching gears over to the Enterprise side of the equation. Just want to clarify a couple of things. You had obsolete inventory written off and they cost you 900 basis points. So, when I think about the normalization of that, it’s still below where it’s been. So, just want to clarify, it sounds like there is still some component availability issues on that front. Do we expect the gross margins there to bounce back a little bit, or are there some other mix issues going on with new products like the 5G solutions?

Samuel Cochrane — Chief Financial Officer

Hey, let me…

Phil Brace — President and Chief Executive Officer

Sam, you want to jump in and take that one?

Samuel Cochrane — Chief Financial Officer

Yes, yes. So, there’s a few things. Correct, there was the sort of obsolete inventory related to the decision around harvesting the home security business, which you also saw an impairment in the GAAP numbers for that. There is also some freight – expedited freight in there; that’s one-time in nature. Getting Mexico ramped up as we were sort of shut down in Vietnam with COVID; so, there was some rushing happening there. And a little bit of mix – like the new product introduction is a small impact there as well with the new 5G product, but nothing material on that front. So, again, as we sort of move forward and that mix improves, those one-time items dissipate, we’ll see improvements there in the gross margins.

Scott Searle — Roth Capital — Analyst

Got you. Very helpful. And maybe if I could follow up on their services component to that, are you starting to see the ability for a higher attach rate or CradlePoint like models to go along with the enterprise business, Phil?

Phil Brace — President and Chief Executive Officer

Yes, that’s an area of key focus for us and an area I don’t think we focused as much on it as a company. And I think it’s early to say with that, Scott. But, I think rest assured, we are clearly focused on driving that kind of attach rate up, and it’s a key part of our products going forward.

Scott Searle — Roth Capital — Analyst

Okay. And last one, I’ll put it in the unfair category, as you know, I like to ask. But, as we look at the world today, I mean, the first quarter results are where we expected you to be maybe four, six quarters out. So, it’s an absolutely phenomenal job on that front.

When I think about a normalized level of operations – maybe if we call it – the second quarter is still supply constrained. I’m trying to get my hands around what the growth rates are as we’re thinking about ’23 in a normalized environment for modules, the enterprise side, and then the services side? Thanks and great job, again.

Samuel Cochrane — Chief Financial Officer

I think…

Phil Brace — President and Chief Executive Officer

Firstly, it’s not [Phonetic] fair for us to comment on what’s going on 2023 at this point other than we’ve got — continue to build order books in there and we continue our super strong demand. The customers are loving our new products and we continue to make more traction. So, with that, we’re just going to do one quarter at a time and continue to focus on delivering profitable growth.

Scott Searle — Roth Capital — Analyst

Fair enough. Nice job. Thanks, Phil.

Phil Brace — President and Chief Executive Officer

Thank you.

Operator

Thank you, participants. I’ll now turn the call back over to the panel for final remarks.

Phil Brace — President and Chief Executive Officer

Great. I just want to thank everybody for joining us on the call today. Appreciate the support. I’d once again like to thank our customers, suppliers, employees for helping working through a difficult situation. It’s been a strong start to the year and we look forward to continuing the momentum into 2022. Thank you.

Operator

[Operator Closing Remarks]