司亞樂 (SWIR) 2002 Q2 法說會逐字稿

Good afternoon. Welcome to the Sierra Wireless second quarter results conference call for July 22, 2002. Your host will be David Sutcliffe, Chairman and CEO of Sierra Wireless. Mr. Sutcliffe, please go ahead, sir.

Thank you very much and good afternoon to everyone on the call. With me here at the Company's office I have Peter Roberts, the Chief Financial Officer and Jason Cohenour, the Senior Vice President for Sales and Marketing. Peter will cover the financial performance and guidance for Q2 and Q3 respectively. Jason will be covering business development, and I'll provide a summary after which all of us will be available to answer questions in the usual manner. With that, I'll turn it over to Peter.

Thanks, David. Good afternoon, everyone. For the record, our forward-looking statement disclaimer. Forward-looking statements involve risks and uncertainties, including, but not limited to changes in technology and changes in the wireless data communications market. These forward-looking statements relate to among other things statements about future market conditions, supply and demand conditions, revenues, gross margins, operating expenses, profits and other expectations, intentions, and plans that are not historical facts. Expectations regarding future revenues depend in part of our ability to develop, manufacture, and supply products which we do not produce today and that meet defined specifications. In light of the many risks and uncertainties surrounding the wireless data communications market, we can not assure you, that the forward-looking statements discussed will be realized.

To our financial results. Our results are reported in U.S. dollars and in accordance with U.S. GAAP. Revenues up $16.1 million, slightly exceeded our guidance range of 14 to $16 million. Gross margins improved sequentially in accordance with our guidance. Our loss before restruction costs of $3 million was at the favorable end of our guidance range of 3 to $3.5 million. Before going to the details of our second quarter financial performance, we would like to comment on our restructuring plan.

On June 24th, we announced a business restructuring program to reduce our operating expenses to reflect current and visible demand with the expectation of accelerating our return to profitability. We are reducing our workforce from 275 to 180 people. The structuring costs of $36.1 million includes severance, charges against inventory, fixed, intangible and other assets, and provisions for facilities restructuring and other obligations. Most of these charges are non-cash. The near term Q2 Q3 cash components are about $3 million. Our discussion of sequential results is on an objective basis and excludes the restructuring charges. To our sequential financial performance, comparing Q2 of 2002 with Q1 of 2002. Revenue increased to $16.1 million from $15 million, an increase of 7%. Revenues were higher than Q1 as a result of our 2.5G AirCard sales. Q2 adjusted gross margin was 34%, up 500 basis points from 29% in Q1. Gross margin improved as a result of changes in product mix and reduced product costs. Q2 adjusted operating expenses of $9.1 million compared to $8.6 in the previously quarter.

Operating expenses were higher than Q1 due mainly to decreased funding from our R&D funding agreements. Q2 adjusted net loss was $3 million, a decrease of 31% compared to a net loss of $4.3 million in Q1 2002. Q2 adjusted loss per share was 18 cents. This compares to a loss per share of 27 cents in Q1. The segmented financial information. Revenues by product segment. The MP line was 15%, AirCards with 60%, OEM with 22%, and other was 3%. Our AirCard sales were very strong this quarter. Revenues by distribution channel, wireless carriers were 44%, VARs were 33%, OEMs 21% and direct was 2%. In this quarter, three major indirect channels continue to be strong. We should expect products in channel segment percentages to fluctuate quarter to quarter based on mix. Revenues by geographical segment. The Americas were 86%. Europe was 8%, Asia Pacific was 6%. The Americas were very strong and Europe and Asia continued to grow.

To our balance sheet. Comparing it to March 31, 2002, cash and short term investments decreased to $31.6 million from $39.8 million. Reduction is due to operating loss, restructuring costs, and working capital flows. For day accounts receivable DSO decreased 51 days from 64 days, which is better than our target of 75 days. Inventory decreased to $7.5 million compared to $24.6 million, reflecting the restructuring charge of $16.7 million. I'll turn it now to Jason for business development.

Thank you. I'm going to cover some of the relevant business development highlights for the second quarter, starting with our CDMA 1x business. As you recall in Q1, we launched the AirCard 555 CDMA 1x wireless network card with Verizon Wireless. And in Q2, together with Bell Mobility of Canada, we announced the commercial availability of the AirCard 555 wireless network card. Which is capable of speeds of up to 144 kilobits per second, on Bell Mobility's next generation CDMA 1x network. Also in Canada, we announced the commercial availability of the AirCard 555 as part of Telus Mobility's velocity wireless service, now operating on the new Telus Mobility CDMA 1x network. Together with Casio, one of our OEM customers, we announced that the AirCard 555 and AirCard 750, which operate on GSM/GPRS networks, would be bundled with Casio's Casiopia Pocket Manager BE-300 to offer complete wireless solutions for mobile users.

Shifting over to our business in GSM/GPRS networks. During the second quarter we received additional regulatory and network approvals for the AirCard 750 GSM/GPRS wireless network card in regions around the world, including North America, Europe, and Asia. Most recently regulatory approvals have been received for China, Hong Kong, and Singapore, while network acceptance has been received in Norway, Sweden, and Holland. I might add that post-June 30, the AirCard 750 was also commercially launched in the U.K. on the Vodafone network.

Sticking with GSM/GPRS, we signed a distribution agreement with Guandong Iscreate Technology to distribute the AirCard 750 to the China marketplace. We also launched the AirCard 750 in China with Iscreate on the Guandong mobile communications network, one of the largest regional operators of China Mobile with over 30 million subscribers. We also announced that Network Electronics would distribute the AirCard 750 to the Singapore marketplace. Initial availability in the Singapore marketplace of the AirCard 750 would be on the Star Hub Network. Also together with M499.com Limited and Hutchinson Telecommunications Limited, we announced the launch of the AirCard 750 in the Hong Kong marketplace.

Now moving back to the United States. During the second quarter, we reported that we continued to experience delays in the completion of the new product approval process for the AirCard 710 on the AT&T Wireless network. Subsequent to June 30th, 2002, and as announced on July 10th of this year, we completed amendments to our supply agreement with AT&T Wireless and AT&T Wireless granted commercial acceptance of the card 710 wireless network card. I might add that volume shipments to AT&T Wireless of the AirCard 710 have now commenced. Those are the highlights. I'll now pass it back over to Peter for Q3 guidance.

Thanks. Inherent in this guidance is the continuation of the higher than normal risk resulting from the inherent uncertainty associated with the timing of completion, approvals, and volume shipment of new products. We expect overall economic and industry conditions to continue to be challenging. Offsetting this, we have a considerable backlog and a range of new products.

Our guidance for Q3, revenues in the range of 18 to $19 million. Gross margins regarded to be flat. Restructuring costs of $600,000 and operating costs of $6.2 million. Our net loss is a range of 300 to $700,000, or 2 cents to 4 cents per share. And for September 30, our cash is a range of 28 to $30 million. With that, I'll now turn it over to David for summary.

Thanks very much, Peter and Jason. To summarize, our revenue for the second quarter increased to $16.1 million from $15 million in Q1, an increase of about 7%. Gross margins were up 500 basis points, and our loss before restructuring was reduced to $3 million from $4.3 million in the previous quarter. We implemented our restructuring plan to reduce operating expenses, maintain our cash reserves, and accelerate our return to profitability. In conducting this restructuring, we also protected our ability to invest for future growth. We've made good progress in new products for the new 2.5G Networks. In volume shipments of the AirCard and SB 555 for CDMA networks, and the AirCard 750 for GSM/GPRS networks, continued during the quarter.

As Jason said, earlier this month we received AT&T's approval and commenced volume shipments of the AirCard 710. Business development during the second quarter included a significant international expansion of our network and regulatory approvals for the AirCard 750 product and additional distribution agreements for that product. As a management team, we're focused on returning the Company to profitability. We plan to drive more improvement by continuing to focus on growing our revenues, managing our cash, and further reducing product costs. With that, we'll turn it over to you for questions. Operator, if you could please queue up the questions.

We will now begin the question and answer session. To place yourself into the question queue, please press star one on your touchtone phone. If you are using a speakerphone, please pick up your handset and then press star one. To withdraw your request, press star two. Your first question comes from Gary Baker. Please go ahead.

Good afternoon. The first question, could you give us a little -- elaborate on your AirCard sales? Obviously, they were strong in the quarter. Can you give some insight in terms of how much Sierra Card 750 might have made up for that, versus the AirCard 555, could you give us a breakdown of the AirCard sales in the quarter?

We've provided a breakdown, segmented results by distribution channel by product line and buy geography, but we're not providing a breakdown by individual product line item, and so it's difficult to address that question in hard numbers. Generally speaking, the AirCard 555, the new CDMA products started a significant commercial shipment early in Q1, and these shipments continued through Q2. The AirCard 710 for GSM/GPRS networks started commercial volume shipments right near the end of Q1 and had its first quarter of commercial volume shipments in Q2.

I guess what I'm curious at is the AirCard 750 given the number of announcements you've had in terms of the timing of when [ indiscernible ] are we starting to see some 750 sales, did we see it in the second quarter? Is that going to be kicking in more in the second half of the year?

For the 750, our revenue to date has been sales to channels, particularly wireless carriers and distribution channels in international markets as we get those channels up and running. During the third quarter we're expecting a good strong performance from the AirCard 750 line, and we should start seeing our first indications of sell through during the second half.

And on gross margins, your're guiding to flat now at 34% roughly, which is what you did this quarter. If we look beyond the third quarter, is there any change in terms of your intention towards 40%, or are we seeing more of a flattening out on the mid-30% range?

The reason why we're guiding gross margins flat in Q3 after having had a very nice improvement on gross margins in Q2 is simply that during Q3 we're expecting offsetting effects on gross margin. A favorable effect from continued product cost reduction, and an unfavorable effect, if I can call it that, from a higher mix during the third quarter of OEM products that traditionally have lower gross margins, so we're expecting those two things to approximately offset each other, hence, we've guided Q3 flat. To the longer term aspect of your question, the trend line on gross margin should continue to be sequentially better, and we do expect to attain the high 30s or to 40% range, as you've described and as we've discussed in previous calls.

Okay. The last question, break even under this new cost structure, do you want to put forth a number then, in terms of top line, what you'd be targeting for break even?

Well, if you look at the guidance numbers we've indicated in the third quarter, we have a little bit of the operating -- sorry of the restructuring expense carrying over to the third quarter, roughly $600,000, and if you eliminate for a break even calculation that nonrecurring item, the third quarter is approximately an operating break even in the guidance range we've given of 18 million to $19 million and that's at the currently guided gross margin levels that is flat for the third quarter.

Thank you very much.

Your next question comes from Depak Chopra. Please go ahead.

Good evening, gentlemen. David, I was wondering if you could talk about what you're seeing in terms of the end market demand. I know it's early to [ indiscernible ] but maybe you could tell us some of the initial user feedback, and what your sales are looking like at Verizon and some of the other channels you're shipping to?

What I could do is ask Jason to cover the customer feedback and I'll come back and take sell through.

So far, Depak, the customer feedback we've gotten has been excellent from a product performance and network performance standpoint. Given that we've been shipping our CDMA 1x cards a bit longer than our GPRS PC cards, we do have more feedback in that area, so far, it's quite positive. It's probably still a little too early to tell on the GPRS front exactly what the end user experience will be since shipments have just commenced in this past quarter.

Could you tell us what type of data rates you're seeing on both sides?

Yeah, on CDMA, the typical data rate that the carriers are talking about are 40 to 60 kilobits per second. I think we've said before, we thought that was a smart marketing move on their part. In practice users see those data rates consistently. That's the floor consistently. And quite often, we're hearing reports and also experiencing it ourselves, performance at considerably higher data rates than that. On GPRS networks, particularly outside North America where we have early experience in feedback, we're also seeing very good speeds, and of course this depends on how the network's configured, but speeds in the 20, 30, 40 kilobits or better are being reported and that's before taking into account compression software, which many users and application providers are using to increase the effect of throughput.

And in terms of sell through, David?

As much as Jason said, we've been selling the CDMA products, the new CDMA products a little longer than GPRS. In both cases it's early to develop any significant trend line. I can tell you we're encouraged by early sell through data, but I can also tell you that from experience, it's not really the sell through you get in the first 60 or 90 days that counts. That's almost always encouraging. It's the sell through that you can sustain over a period of several months or quarters post the initial launch window that is the real measure, and it's just too early to have hard data on that.

If you could talk a little about the OEM and the OEM on the PDA slot. I think as a general -- we were expecting contracts to be sort of quicker on the CDMA OEM front. In terms of the overall industry, it seems the OEM contracts are slower to develop than we all thought. Maybe you can talk about that and how is that pipeline forming up for you? Toshiba's a great win and what are the expectations in terms of the Company going forward?

I think your comment that overall, the collective expectation of PDA, OEM opportunities would come through quicker is probably a fair comment for the whole sector. I'll tell you, I'm not at all disappointed of the progress we've already made. Of the companies, of the computer and handheld companies that have integrated CDMA 1x and gone to market, we've picked the right one so far. We're on the market actively selling with Toshiba on the Verizon network, soon to be selling with Toshiba on the Sprint PCS network, and there really isn't another leading PDA or computer company that's brought a CDMA enabled PDA to market yet. I feel on a competitive basis, we're doing fine. I'd like to see more of the PDA companies come to market, as you've alluded to.

Switching to notebooks, we have design win and product coming through the system with Panasonic. They're a significant existing OEM of ours on early generations of wireless. We've got a pipeline. We also have a design win with Itronix on their ruggedized notebook platform. And we have a pipeline of additional notebook and PDA opportunities we're working on. So I'm comfortable with our progress in the set of opportunities that are available and the fact that we're out front being first to market with this class of OEM products and designed into the end products that have come to market first. I'd like to see more PDA and computer companies get to market. With the opportunity funnel we're working with, we're certainly continuing to work those kind of opportunities.

Are Electronics and Panasonic are in the 2.5 g fund?

They are both existing OEM customers of Sierra Wireless for 2g products and they're both companies with whom we've got design wins on the 2.5g CDMA products as well.

Thanks.

Your next question comes from Andrew Lee. Please go ahead.

Just on the gross margin side of it, is it fair to extrapolate that you're receiving sub 40% margins on your large contracts for the 2.5 PC cards?

I think that would be -- that would not necessarily be correct. What you should be extrapolating is that OEM business is consistently below the 40% gross margin level, and that in any quarter where OEM business is heavily weighted, it's a significant arithmetic pull down on our reported gross margins. And I'd like to make the observation again, gross margin is one measure we focus on quite a lot, so naturally it gets focused on in these calls. I don't think that lower gross margins on OEM business and the fact that they blend our overall gross margins down is bad for the business. The OEM business has lower gross margin, it also has lower sales and marketing costs, and so it's reasonable to think that the OEM business is on par with the other businesses, the other segments like PC cards on a contribution margin basis. So when you see us reporting a quarter that's high on PC cards, our margins go up, and when it's high on OEM modules, our gross margins go down and that's a normal quarter to quarter mix fluctuation in our business.

I'm just trying to reconcile the 60% AirCards in the quarter, and the consolidated 34% margins.

Right. I don't see any contradiction in that. The sum PC card business is at lower margins than other, but, you should not model PC card business across the board at under 40%.

Okay, and the renegotiation with the AT&T contract, was there any negotiation on the price per unit? First at the original $30 million contract.

Yes, the price per unit went up.

It went up?

That's correct. And, therefore, the gross margin, the forecast gross margin on that business improved.

Okay, great. In terms of the guidance, Peter,does your earnings guidance assume a tax recovery, and secondly on the operating expenses, does that factor in amortization, or I guess it's not included?

Operating expenses includes amortization, on the tax recovery, we have a tax recovery included in the chart in the three months to June. Going forward to the last half of the year, there's no tax recovery in terms of cash back from a government, but we have less carry forwards, hence there will be little other no taxes in the two following quarters.

There is no tax recovery in the quarter?

There is a tax recovery in the quarter end of June. But in the two quarters going forward, as you know, we've got less carry forwards, so therefore there should be no tax charges.

And I guess last on the strategic side, what does the difficulty of Novatone mean on the existing contract? Are you seeing any potential business uptick given that there may be an issue with that company being able to fulfill their orders?

Well, the effect that we're noting is that we have increasing -- we have more than twice Novatel's revenue levels in Q1 and more than twice their preannounced revenue level for Q2, so we're already holding over two-thirds of the business that the two companies compete for. We are not forecasting that Novatel's going to go away in our view of the business, we've always had competitors, whether it's Novatel or some of the other companies that preceded Novatel, and so we compete hard for the end customer business, and for the channels, and we like to focus on winning the most profitable business. And hopefully if we can call it right, leaving the unprofitable business to our competitors.

One more. Does your Q3 guidance include shipments to Sprint PCS on the 2.5g front?

Yes, it does.

In terms of size, is there any color you can give on that?

We have two kinds of products that we expect to go on the Sprint network. One is the CDMA 1x PC card class product, and the other are CDMA 1x products that have CDMA 1x embedded modules in them. One already public example is the Toshiba Audiovox Thera, so those are two components of our business that have a Sprint connection. On the PC card side of that ledger, the Q3 guidance has less than 10% revenue exposure to Sprint. And on the OEM side, I'm not going to quantify that for competitive reasons.

Thank you.

Your next question comes from Barry Richards.

Good afternoon. I wonder if you could identify for us the biggest customers in the second quarter, the three biggest customers?

Barry, we don't have that right in front of us, and that means there was no one customer over 20%, which would create a major customer disclosure requirement for us.

And if you were to guess how many customers then were over 10%?

Typically, and that's off the top of the head, typically that would be three or four customers in a given quarter.

Okay. And given you've had a couple of quarters of improving top line results in your forecasting of another quarter, I wonder if you can talk about what you think the sustainable growth is in terms of annual growth given some of the changes? I know that's probably a speculative comment, but if you'd just try your best.

You already said it. Given the overall economy challenges and then the challenges within the sector, it's very hard to call near term growth rates. You're right to point out we're having some sequential or return to some model sequential quarterly growth and we're very pleased with that. Trying to call a longer term growth rate is very difficult. We do observe that prior to both the bubble and the burst, the long-term multi-year compound annual growth rate for our business, and we think that's probably a reasonable proxy for adoption of wireless data by Enterprises in Government, that rate was over 40% compounded annually over a multiple year period. But, you know, our revenues went up 121% in 2000, they went up 11% last year, 2001, and it's very hard with those kinds of swings up and down to pick what the growth rate will be. Frankly what we're doing from a business point of view, with the restructuring, is fundamentally structuring the Company so that we can get it to break even and then profitability at revenue levels that we can see in the near term and at gross margin levels that we can see in the near term and then any sustained significant growth from there would be all to the upside.

You've talked a fair bit about the new customers that are coming on-stream and I wondered if you could quantify for us what the typical customer looks like in terms of inventory billed or initial distribution fulfillment just in terms of the range of number of units or in terms of dollars what you might see in terms of what you ship initially to these carriers up front?

I'll comment on that. I would say the answer to that question varies widely depending on geography and depending on the specific channel partner in that geography. Generally what we see from our new distribution agreements, whether those distribution agreements be with a wireless carrier or an IT distribution partner, generally they'll start with a significant stock in order to charge up their own channels and get to marketplace, and then over time, flatten those shipments out in order to meet end user demand. So there is no direct answer to your question unfortunately, but the general model is start a bit higher, get the channels charged, get the marketing machine cranked up, begin the aggressive push, and then try to model shipments to meet end user demand.

For some of the bigger customers, would a number in the 5 to 10,000 unit range be unrealistic?

For large customers, that would not be unrealistic.

Lastly, you came in just above the high end of your range. Is there anything specifically that you can comment on that allowed you to do that?

It was really a confluence of factors, candidly. We continued good channel growth momentum with our CDMA 1x cards. We started that off strong in Q1 with Verizon. That continued throughout the quarter. We picked up a couple new channel partners in the CDMA 1x space that helped a lot. On the GPRS/GSM space, a lot of growth was fueled by opening up a lot of new geographies and new distribution channels outside of North America, and that clearly was an encouraging sign and something that contributed in a material way to Q2.

Thank you and good luck.

Thank you.

Your next question comes from Gus Papageorgiou. Please go ahead.

Thanks.

My question is also geared toward Peter and the balance sheet. Three things. The payables, you spent $7 million bringing down the payables and payable days. You got down to 33 days from about 100 days. Can you tell me why you did this, and what kind of payable days you should assume going forward.? And the long-term obligations increased by $2.7 million. Can you tell me exactly what that is, how much of that is -- and if the reversal of that is going to be a cash item going forward and the similarly on the accrued liabilities, they're up $4.4 million. How much of that is due to the restructuring, and if once those are reversed, how much of that is cash and what the schedule is like for the cash payments?

Okay. I'll take them one by one. Accounts payable. The accounts payable, what has happened in there, we've paid off -- it's an inventory question. The manager of cash as we've mentioned many times before, and one of the things we obviously have to do is pay our suppliers for inventory. So as you see in the growth in revenue, one of the things we do is paying down the payables.

Is that 33 days of payable days, is that kind of the good figure to use as a forecast? What kind of a payable days should we use to fork out the payable items?

We're attempting to manage our payables on the longer term than that just given the economic environment et cetera. On accrued liabilities, one of the main factors that's in there is some of the costs that we have. There are probably some of the restructuring costs are accruals.

And how much of that is cash?

When you say how much of that is cash ...

The accrued liabilities are $4.4 million. Am I assuming that all of that is reversal going to be cash items going forward?

Yes, the accruals we have ultimately are going to be paid out in cash. On the long-term obligations, the main factor that's in there, as you recall, the main items in long term liabilities are basically capital leases. In this period, we also have in there long-term liability relating to our facilities restructuring. That is cash that will be paid out over time.

Can you tell me roughly what period of time?

Years. Years, yes.

And for the accrued liabilities, can you tell me a time frame as to the payments, cash payments for the reversal of those accruals?

First of all, they're all within 12 months, so they're current obviously,. And that's it.

Thank you.

Your next question comes from Tim Luke. Please go ahead.

Thanks. A couple of clarifications. I was just wondering how you see your cash balances as you exit September, if you have a sense of what you think that's going to be.

You may recall, Tim, it's part of the call in the guidance section we made, our cash of being $28 to $30 million.

And then international as a percentage of sales, do you have a figure as to where that might be now and how you see that as you exit the year?

Yes, for Q2 we were at 14%, and weighted slightly towards Europe over Asia Pacific, and we are continuing, quite candidly, to invest in business development efforts in both of those regions, even increasing slightly in Asia Pacific, so we see that percentage of sales continuing to grow over time.

And as you move through to December, should we expect significant shipments into the Sprint end market or is most of the fill-in to Sprint happening during the September quarter?

I think you want to look at Q4 and -- well, Q3 and Q4 as being fairly broad-based across quite a range of carriers and also noncarrier distribution channels such as resellers and OEMs. So I think when you ask about Q4 and Sprint, we generally avoid answering quantitative questions about individual channel partners, but we're expecting to get started with shipments to Sprint in Q3 and to continue in Q4, and we would expect Sprint to be one part of a fairly diversified set of distribution channels.

Maybe then more broadly, if you could talk a little about how you're seeing GPRS gain momentum in Europe and in some of the other markets, what some of the initial feedback has been there?

I'll comment on that. Specifically outside of North America, the GPRS momentum is definitely building, particularly in western Europe and in Asia and inside of Asia, particularly China for us. Feedback so far has been quite positive from a product performance standpoint. From a network performance standpoint, we are encouraged at the amount of marketing push we're getting from our partners both IT distribution channels and wireless carriers, so wireless data appears to be important to those channels and to those wireless carriers, so we're encouraged by that. Since we started shipments really just at the top of Q2 and perhaps a little bit in Q1, it's tough to say exactly what the end customer pull-through is just now, but I can tell you the enthusiasm is there, the feedback has been positive, and the push is quite aggressive.

Thank you very much. Good luck.

Your next question comes from Mike Walkley. Please go ahead.

A quick question for Peter. Just wanted to clarify something on your income statement. You talked about the $36.1 million of special charge. Is 19 of that in gross margins? And 13.1 in special line item and then, is the remaining 4 in the tax income expense line? Is that where the remainder is?

Yes.

And then on your -- can you give us a percent of your sells that were CDPD related this quarter?

We don't provide that information, Mike. We provide the segmented information on AirCard, OEM, and MP, but we don't break it down between CDPD, CDMA, and GPRS.

Okay.

I'll make a qualitative supplement. We did see in the quarter sales of CDPD AirCards begin to drop off a bit as demand for our 2.5g AirCards picked up, but I will say our specialty products, like our NT product line, which we sell to public safety agencies and utilities and field service organizations has been quite strong. And we continue to focus a lot of business development effort in that area.

Great. So you think that business -- [ indiscernible ] to this year?

Looks good. In fact, we just did a release announcing a large roll-out with the Florida Highway Patrol for our mobile product line, so public safety is a believer in CDPD, and thankfully in our CDPD products.

Any comments on linearity of the quarter and how the start of this quarter is shaping up?

Well, it's 22 days into July so I'm going to ask my team to duck that question. We get one duck per call.

How about linearity last quarter? Or the second quarter?

It was pretty good actually. We had a bit of business that we weren't sure on timing of until partway into June, and hence, coming in a little above the guidance range, but it was a a fairly linear quarter. We're trying to manage the business that way to the extent we can. We only have so much control over that. The rest is up to the channels and the market.

For the Toshiba, the previous $11 million backlog, are you still shipping against that yet or has that all been shipped now?

That's a good question. We're doing quite well in fulfilling the initial volume commitment to which Toshiba made, which was as you said $11 million, and some of our leading leading indicators suggest that we may do better on that over the course of the full year.

Ok. So some Toshiba shipments are in your next quarter guidance?

That's correct.

Thank you very much.

The next question comes from Howard List. Please go ahead.

Most of my questions have been answered. What's the current head count as of today?

We're transitioning between head count we had prior to the restructuring of 275 people and a target head count 180. That means a reduction of about 95 people, approximately two-thirds of whom have already left and approximately one-third are working out contract completion or working notice periods.

And your target head count will be achieved by the end of the quarter?

That's correct. We'll hit our target head count by the end of the current quarter.

On your balance sheet, your deferred revenues and credits dropped in half. Just wondering what caused that during the quarter?

We've earned some of the R&D funding amount we had originally deferred.

Great. I know you partially answered the question already on the long-term obligation line, increasing $2 million. Is this -- you're now including the lease on the second facility in that line?

Yes.

Okay, and is that the full course of the lease reflected in the $2 million?

Yes. We have, as you know, the way we do this, the future lease payment we have and the present volume.

Right. How long is that lease for?

I'd like to interject for clarity, part of our facilities restructuring charge goes into our current obligations because it's the next 12 months. And part of it goes into long-term. So for clarity, what's gone into long-term is part of the facilities restructuring charge.

Right. Okay. And how long is the lease for on that additional facility?

We haven't disclosed details on lease duration on the second facility, although there's quite a significantly detailed note on lease obligations in the notes to our audited annual financial statement. I'd like to refer to that so we stay consistent on our disclosure.

Just one final question on cash. You provided the range earlier in the call of 28 to $30 million at the end of the September quarter. At that point in time, will all of the cash obligations related to severance and settlements and outplace and service and whatever else you factored in?

Yes.

Okay, so you'll have nothing related to the restructuring cash-wise following that?

Well, I think none of the items you just listed, Howard, but remember, for example, you just asked about facilities.

Yes, otherwise you'll be clean on that.

We'll be done on all the people stuff during this quarter, but any longer term obligations for which we've accrued and that have a future cash component, obviously, that doesn't affect things like inventory, but things like facility, excess facilities, that will have a future cash effect spread over a long period of time.

Do you have an estimate at this time for where you see cash at the end of the year?

We do, but we're not providing guidance out for the fourth quarter yet. If you set aside the restructuring effects that we just talked about, we're guiding our third quarter at very close to an operating break even, and the very modest outflow of cash. By the fourth quarter we'd expect to have improved on that performance in terms of cash management.

Thank you.

Your next question comes from John Bucher. Please go ahead.

Good afternoon. You all made progress on network and regulatory certification on the GPRS area. I was wondering if David or Jason could comment on how the process has gone for inter-vendor, inter-operability testing for GPRS? Is it largely, are there processes and procedures in place that is more straightforward than it's been in the past?

Well the key, when you talk about inter-vendor testing in our case, that testing of our subscriber device, our data modem with the networks from a variety of different wireless infrastructure equipment providers. And on the GSM/GPRS front, we've completed that inter-operability testing with -- in fact, mid-June we had already completed it with six of the first nine GSM/GPRS infrastructure providers that we were targeting testing with, and since then we've completed one additional so we're now at seven of the nine major providers that we have targeted. The process has gotten progressively, I don't want to say easier, but more predictable as we and the infrastructures companies have gone through a learning curve, it's getting more predictable and the results are more predictable now and more timely. Although there's still a few more tier one infrastructures we want to complete testing on, we're satisfied with our progress in that area and that it's a reasonably well understood area now, which is something that I don't think any of the companies could reasonably say six to twelve months ago.

Thank you very much.

Next question comes from Michael Urlocker. Please go ahead. Good afternoon.

I have a few questions. First off, I'm wondering, Peter or David you could offer a view of maybe what the budget or intentions are with regard to CAPEX through the rest of this year and next year?

There's not much going out, Mike in CAPEX. As part of the restructuring, we obviously got excess equipment, so there's very little planned for the rest of the year.

I know this is a bit of a stab in the dark, but everyone has to make a call on this. How about through 2003?

'03 CAPEX?

Yes.

Well, '03 CAPEX is going to be driven by volume, volume drivers. The two significant consumers, the capital investment in our business, our equipment for R&D or development engineers, and we're amply endowed with that sort of equipment for the foreseeable future. The second major consumer of CAPEX is on production, that is, test equipment and fixtures and other systems that we provide that are used by our contract manufacturers in producing and testing our products. And CAPEX in that category is going to be a function of unit growth over that time window. It's far too early for us to call that yet, but as Peter said, I think capital expenditures, given that we went through a major CAPEX ramp to scale the Company for higher volume over the last two years, CAPEX expenditures for the next year or two ought to be fairly modest.

To put a context here, in 2001 your CAPEX was something like $10.5 million in '99 it was something like one-tenth of that. Sounds like you're going to be closer to the one-tenth level.

We'll be in between those two fence posts, and with not a lot of pressure early on on CAPEX.

And David, I'm wondering if you could describe maybe not so much in terms of products, how you feel, the competitive environments rolling out, but maybe what you see as the health of the industry itself in terms of wireless modules?

Can you run that question by me again? I don't understand it.

Well, I guess my sense is, and other questions have alluded to this, that there's been delays in terms of requirements for wireless components of the PDAs compared to what we might have thought. There's been a little bit of floor roll-out or checkoff for intra-operability on GPRS, et cetera. My sense is that probably everybody in the industry is suffering a little bit, and I'm curious what your perspective is.

Right. I think the thing that we've seen some evidence of in computer companies and -- well, principally computer companies, whether we're talking notebooks or handhelds, we have seen evidence of those companies have gone through wrenching adjustments in their R&D in rationalizing their R&D expenses and their R&D programs that in some of the companies, the plans to do wireless integration on their product platforms have been delayed or cancelled, or deferred indefinitely. On the other hand, we've seen companies that are making those very tough rationalizations and who have decided to bet ever more precious R&D program dollars specifically on wireless integrations because they believe that that will add utility to their product and add margin and differentiation and defensibility. So it's -- if you look at the whole picture, you could probably say overall, there's less of those products, the wireless integrated products coming to market than people might have expected at this instant in time.

On the other hand, it's not across-the-board by any means. The other observation that we're seeing, and it could be fairly favorable for our business, is that we're seeing some of the computer companies decide to do channel deals that bundle or tie in an aircard product who might otherwise have proceeded with an embedded module development. And the beauty for the companies that are doing this, of going with aircards, is to have essentially no up front development costs and an easy path to market to offering their customers a reasonably integrated wireless solution or bundle and not a lot of risk up front. To the extent that that happens with companies that might otherwise have done OEM developments, we'll pick up higher ASPs and higher margins for that interim period of time until those companies have gone through a sufficient market learning curve and are ready to commit internal wireless integrated solutions, and so there might be a little bit of a silver lining on that.

To look at the Toshiba or Audio Vox product, can you help us understand any way that we would have a better view of what you think the end sales are on that?

You know, I'd love to be able to give you insight into that, but the hard reality there is it's just way too early to tell. Toshiba announced that product in March, and if I can recall my timing correctly, Verizon started delivering it through its channels to customers in May, and Sprint has not yet started commercial volume deliveries of the Thera, and the Toshiba and Audio Vox product. So it's just way to early to get any sense of what the overall opportunity is. I do know that the Toshiba people who are working on bringing these wireless enabled PDAs to market are very aggressive business executives with a long history of building market share -- leading market share positions in businesses such as the notebook PC area where Toshiba is traditionally, a very major player, so they have strong ambitions.

If Toshiba were to market that product under their own name in the U.S., you'd probably have a pretty good sense that there'd be a step-up in demand, would you not?

I have no idea, other than Audio Vox is a very strong brand in wireless and Toshiba has a strong brand into the enterprise with notebooks and servers and other IT solutions. It would be nice to find a way that both brands could be in the market through their respective strong channels.

And my last question is not meant to be pointed, but just in a more general sense. You've been through a period where the market's been different than what we had all expected a year ago, you've started a restructuring program, you've changed some of your executives. Maybe it's inappropriate to ask at this point, but are you looking at any slots within the firm where you want to add strength in terms of management or are there any areas you feel in the current tough times it might be easy to recruit into Sierra Wireless?

That would be a delicate question. I could tell you as a CEO, I've always looked to hire ahead, and make sure that each member of the senior management team is strong enough and capable enough and experienced enough to lead their functional area, you know, not just in the past year or two, but that they're able to do that in the year or two going forward. So as a restatement of what we've always done, I would expect to continually challenge our management team and promote from inside as we have as well as recruit from the outside as we have to make sure it's strong for what the business needs going forward. As to the recruiting climate, frankly I think this is a great time to do what we call strategic hiring. There is an opportunity to attract very strong people in who wouldn't normally be as readily available, and our Company in the commercial market we operate in, has a very strong presence, a strong brand, and the leading market share in the early going, so we've been able to recruit great people in the past and I certainly would expect in current conditions to continue to be able to do that.

Thanks very much.

Your next question comes from Glenn Tracy. Please go ahead.

Than you. Most of my questions have been answered. Just a couple quick questions about Sprint. Has Sprint identified when they want to receive their first shipments?

They have.

They have. And have they expressed any interest in the AirCard 555 in addition to the 550?

Well, the difference between the 555 and the 550 is largely the difference between single band and a dual band, and Sprint only operates its network on the single PCS band nationwide in the U.S. So I don't think they have any requirement for the 555, the dual band version, or any interest in that product, but I suppose I could be proven wrong.

I was wondering about any possible roaming requirements if they might want to provide roaming ability for their customers.

That's a subject that's got some important ramifications. In the U.S. market, they operate, Sprint operates a near national network. The other major U.S. provider would be Verizon wireless who operate a national dual band network and I don't think that they're traditional roaming partners. From Sprint to international markets, there could well be roaming opportunities. Sprints' affiliate in Canada is Bell Mobility, and Bell Mobility is already purchasing the AirCard 555, the dual band product from us. Verizon's traditional roaming partner in Canada is Telus Mobility, and they're also purchasing the dual band product. So I suppose on international roaming, there's an -- an interest in dual band could develop. At this point, the international affiliates are already going for the dual band products.

With -- I guess Star Hub and AT&T, there's been announcement that they can do roaming now and Star Hub is taking the 750, originally AT&T was taking the single band 710. I guess that's where I was leading from.

That's a good line of thinking on international, and to your point, when we announce the amended AT&T agreement, and I'm not sure if we highlighted this sufficiently, but I'll do that now, under the new agreement -- under the old agreement, AT&T was only to purchase the AirCard 710, the single band product. Under the new agreement, they'll be purchasing both the 710 single band for their own North American use and in addition to that, they'll be purchasing the AirCard 750 or tri-band solution, which would certainly have applications in international roaming.

Right, and have they started purchasing 750 in addition to 710?

Not yet. They started taking commercial volume deliveries, on the AirCard 710, we're going through a now familiar product approval process on the AirCard 750 with AT&T Wireless.

In looking forward to the remainder of the year and the sales pipeline, the channel development pipeline. Do you foresee any more agreements in North America within the remainder of the year or are you only -- well, not only looking, but only expecting outside of North America to reach agreements with carriers?

I'm actually going to answer that because it's part of Jason's quota. Although we have a very strong position in the North American market, there are carriers and resellers and OEMs who either aren't working with anyone yet or who are working with other than Sierra Wireless, so we are active in working to win additional channels and customers in North America in addition to the significant growth opportunity we see internationally that Jason described previously.

Am I hearing that that's factored into what your expectations are for Sierras' performance the remainder of the year?

We expect to add additional channels of distribution in North America for the remainder of the year.

One point of clarification with regard to Sprint and Q3. I believe you made a comment about you expect less than 10% exposure for PC cards with regard to revenue for Q3. Is that with regard to PC card revenue or total revenue, the less than 10% exposure?

Our total exposure in our Q3 revenue guidance comes from the AirCard 550s or PC cards to Sprint. It's that ratio is less than 10%.

Of total revenue?

Of total revenue.

That's all my questions for now.

Okay.

Your next question comes from Ray Sharma. Please go ahead.

Given the length of the call maybe I'll restrict my questions to one area, and that's on backlog. I was wondering if you could give us some additional color on what the state of the backlog is, and if you don't feel comfortable giving us the specifics, how backlog has trended quarter over quarter, Q2 versus Q1? And maybe give us a qualitative description about the material components that previously were included in backlog, where we are vis-a-vis the status the contracts similar to the comment you were providing in regards to Toshiba earlier. Thanks.

Working through the components of that question, obviously, during Q2, we backed out all of the AT&T contracts from our firm sales order backlog and early in Q3, we booked or rebooked the newly negotiated smaller order, and so that -- given the size of the order we debooked in Q2, I really have to back that out to make any intelligent comments on trend. So to your question on what does the trend look like, we did have a positive book to bill ratio setting aside the debook and rebook of AT&T wireless. During Q2 we had a positive book to bill ratio, that is greater than 1.0. We did that in a quarter where we increased our top line by 7%, so we thought that was a good indicator. Of those new bookings, we're seeing the great majority coming from 2.5g products. In terms of bookings for delivery in future periods, that is, bookings in Q2 for delivery in Q3 or later, we're seeing a significant falloff in the forecast and bookings for some of the CDPD or 2G products.

So when we evaluate the relationship between backlog and your financial forecast for Q3, what sort of visibility ratio do you have to take to your numbers for Q3?

We have very good visibility, which is good visibility on the demand side or order backlog. Of course, that visibility's constrained by any kind of execution risk on our part or timing risk on our partner's part, but we have very good visibility for our Q3 revenue guidance.

Do you feel comfortable with giving us a range of where the backlog is currently? Or how you exited the quarter including, actually it would be most useful to do it, if you could do it, including the readjustment toward AT&T Wireless relationship.

We don't report the backlog mathematically, but to try to give you some sense of that, at June 30, at the end of the quarter, we had debooked all of the AT&T order and rebooked none of it. So our backlog of June 30th had no AT&T Wireless orders in it. At that point, our orders that were in the backlog are the balance of the Verizon volume commitment for AirCard 555s. The balance of the Sprint commitment for CDMA PC cards, that is the 2.5g portion of the Sprint commitment, and the balance of the Toshiba $11 million initial volume commitment for the SB 555, the embedded modules, and also in our backlog are a fairly significant number of smaller and medium size orders which are below the size of the Verizon or Sprint or Toshiba commitments, but which are none the less significant and contractually firm and form a good part of an increasingly diversified backlog.

Thank you.

Your next question comes from Chris Natowski.

Hi, guys, I just have one question. I want to ask if you could update us on the prices that you sell the AirCard 750 and 555 to your partners for and I'll wait for the second part.

I'll comment on that, Chris. Our ASPs specifically in our AirCard product family, which doesn't include OEM modules that have a lower ASP, cover a range and that ASP range runs from the mid to upper $200 range, mid to upper 200s, and up well into the mid-300s, and that's depending on the specific technology platform that the AirCard is based on, whether it be GSM/GPRS or CDMA, and more important than that, it depends on the volume commitment coming from that particular customer or channel.

The follow-up to that. With respect to Vodafone, you recently launched there, and they've announced a pricing plan where they'll sell the card as low as 199 pounds. Equating that at U.S. dollars, does that imply they are they selling it at a slight subsidized price to their own customers?

I can't really comment on how Vodafone is pricing the AirCard 750 and whether or not they're subsidizing it. I will comment that they together with us have put together a very aggressive push promotional strategy targeted at both Vodafone corporate customers as well as Vodaphone retail outlets.

I'm trying to get a sense of 199 pounds, equates to about $300 U.S. I'm trying to get a sense of either they are subsidizing it and they committed to lower volumes or they are not subsudising it and they committed to high volumes in which case you're selling it at the lower end of that 300 price.

Right. You'll have to ask Vodafone U.K. to comment on that.

Thanks. In terms of the pricing plans that the carriers have out there, are you noticing any trends in terms of sell through dependent on the pricing plan? For example, some of the U.K. carriers are charging a little more, whereas Trimobile is charging the equivalent of $25 a month for a flat rate GPRS. Are you noticing any difference in the sell through? I think you know what I mean, right?

Yeah. I know exactly what you mean. Candidly, it's just too early to tell. Sell through in general is too early to comment with any degree of accuracy on. So adding the additional dimension of trying to assess how pricing plans impact sell through, it's just tough at this moment in time. It's really tough to compare pricing plans for a market like China to pricing plans for a market like the U.K., for example. They're two dramatically different markets I'll make a general comment, and this is going back to our experience in the 2 g world. As a general comment, it seems that flat rate pricing plans, whether they be low or high, flat rate predictable pricing plans seem to be preferred by end users uniformly.

Thanks very much.

I think we're running well into time here. Perhaps Operator we have time for one more question.

Your next question is from John Solfrance. Please go ahead.

Hi. I made it in just under the line. Hopefully these will be quickly answered. I was looking at the MP line. It's essentially flat with Q1. Was there any Florida State Trooper revenue booked during the Q2, or should we expect an uptick in Q3 as a result. And on the OEM side, it was down 40% and if you could maybe refresh my memory. It was a pretty strong performer for you in Q1. And was that related to Toshiba related OEM revenue or Panasonic or what? And what are sort of your expectations going forward for that area? And then finally, your tax recovery, I missed what the number was for the quarter and what you can expect going forward.

Okay, on the question on Florida, we have some deliveries to Florida for each -- it's spread over multiple quarters so you should not expect a big uptick in any one quarter. On the question on OEM, in percentage terms, in Q1, OEM was 40% of our revenue and in percentage terms, in Q2, OEM was 21% of our revenue. Now the OEM business in general is very lumpy. We have quite a number of OEM customers, but in any given quarter, we tend to have a small number of customers make up most of the OEM portion of the revenue, and frankly, it's just wrong for us to comment on which individual OEM was taking deliveries in any given quarter. I'd like to just remind you that OEMs lumpy quarter to quarter.

Would it be fair to say with Toshiba, they would have taken an early initial ramp, on the front end, as opposed to the back end?

Well, it's fair to say with any OEM that when they finally go through the process of integrating an OEM module from a vendor, that they tend to then have a go to market, an initial go to market production requirement that's required to get their channels loaded up and ready to sell, and Jason referred to that a little while ago in the context of carriers. It's also true for OEMs. The other thing is we have, we had a very strong quarter in terms of mix on OEM in Q1. And if you recall back to the earlier discussion, we're also expecting OEM mix to be strong or significant in Q3, and that is in fact why we've held our gross margin guidance flat for Q3, even though we are expecting continued product cost reduction and gross margin improvement.

And just quickly on the tax recovery?

Approximately $600,000.

What can we expect going forward?

We're not providing any guidance John, in that sense going forward, but you maybe missed the early part of the call. We have loss carry forwards that we can apply those in the future periods.

Thank you.

Okay, Operator, thank you very much. To anyone who's on a call who was queued up and didn't get their questions answered, management is available at the Companys' office and you can reach us by calling 1-604-231-1100. Thank you very much.