司亞樂 (SWIR) 2002 Q3 法說會逐字稿

Please stand by, your meeting is about to begin. Please be advised that this call is being recorded. Good afternoon, and welcome to the Sierra Wireless third quarter results conference call for Tuesday, October 22nd, 2002. Your host for today is David Sutcliffe. Mr. Sutcliffe, please go ahead, sir.

Thank you, operator. I'm David Sutcliffe, the Chair and CEO, and I have here with me for the call Peter Roberts, the Chief Financial Officer, and Jason Cohenour, the Senior Vice President of Sales and Marketing. Peter is going to get us started with the forward-looking statements disclaimer and Q3 financial performance. Jason will cover Q3 business development progress. I'll speak to an update on management and governance developments, and we'll round that out with Peter talking about an expansion to our operating line of credit, and providing our guidance for Q4. Now, Peter, over to you.

Thanks, David. Good afternoon, everybody. For the record, our forward-looking statements 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 fact.

Expectations regarding future revenues depend in part on 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 communications market, we cannot 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 of $20.1 million exceeded our guidance range at 18 to 19 million. Gross margins improved sequentially. Net earnings of $0.5 million, and the return to profitability was better than our guidance of net losses of $300,000 to $700,000. We were cash flow positive for the quarter. Our cash balance increased to $32.9 million, better than our guidance range of 28 to 30 million.

To our sequential financial performance, Q3, 2002 compared to Q2, 2002. Revenue grew to 20.1 million from 16.1 million, an increase of 25%. Revenues grew as a result of increasing our 2 ½ sales in North America, Europe and the Asia Pacific region. Q3 gross margins increased to 26.3% from adjusted gross margins of 33.8% in Q2. Gross margins improved as a result of changes in our product mix and product cost reduction. Q3 operating expenses, excluding the carryover of restructuring expenses of 200,000 were 6.6 million, compared to Q2 adjusted operating expenses of 9.1 million. Operating expenses decreased mainly as a result of our restructuring plan. Q3 net earnings were half a million dollars, compared to an adjusted net loss of $3 million in the previous quarter. Q3 diluted earnings per share were 3 cents, compared to an adjusted loss per share of 18 cents in Q2.

Our financial performance on a comparable basis comparing Q3 of 2002 with Q3 of 2001. Revenue increased to 20.1 million from 12.9 million, an increase of 56%. Gross margins in Q3 were 36.3%, reduced from an adjusted 40% in the comparable quarter in 2001. Q3 operating expenses, excluding the carryover of restructuring expenses of 200,000, were 6.6 million, compared to 8.4 million in the comparable quarter in 2001. Q3 net earnings were 500,000, compared to an adjusted loss of 2.9 million in Q3 of 2001.

To segmented information: our revenues by product segment. were 7%, was 65%, OEM was 26% and other was 2%. Our sales continue to be strong in this quarter. Revenues by our distribution channels: wireless carriers -- 51%, value added resellers -- 22%, OEMs -- 26% and direct was 1%. Our three major indirect channels continue to be strong. We should expect product and channel segment percentages to fluctuate quarter to quarter based on mix. In our revenues by geographic segment the Americas was 83%; Europe was 11% and the Asia Pacific Region was 6%. The Americas are strong and Europe is growing.

To our balance sheet, a comparison to June 30 of 2002, cash and short term investments increased to 32.9 million from 31.6 million. This increase is due to cash generated from our operating earnings and working capital flows. accounts receivable DSO decreased to 48 days from 51 days, and this is better than our target, 75 days.

Inventory decreased slightly to 7.4 million from 7.5 million. Now to Jason to business development.

Thank you Peter. I'll begin with business development activities in our TDMA product line first. During the third quarter we received approvals from Sprint PCS for our AirCard 550, a TDMA 1X PC card, and we participated in a launch of the Sprint Vision Network in August.

We also commenced limited volume shipments during the quarter, however, some shipments were limited by logistical constraints and we expect volume to increase in Q4. With the Sprint launch we became the first wireless data modem provider to supply the four largest North American CDMA carriers.

They being Bell Mobility, Sprint PCS, Mobility and Verizon wireless with TDMA 2000 1X PC card modems. Further establishing our leadership position in TDMA PC cards. Also during Q3, the AirCard 55 was approved on two TDMA networks in Asia and we commenced initial low volume shipments to the region for TDMA PC cards.

I'll turn now to business development in the GSMGPRS space. Beginning first with Europe. In July we announced the commercial launch of the AirCard 750, our tri-band GPRS PC card, on the phone U.K. GPRS data network. Shortly following this, one of our OEM customers, , a designer and manufacturer of ruggedized wireless mobile computing solutions, was selected to deliver up to 6,000 of their Go Book notebook computers to , Britain's leading distributor of natural gas.

Each of the Go Books will be outfitted with the Sierra Wireless SD750, which is the OEM variant of our AirCard 750. These devices will operate over the phone U.K. GPRS data network. The AirCard 750 was also approved on the KPN GPRS network in the Netherlands and initial commercial shipments have commenced there.

We signed a distribution agreement with to offer the AirCard 750 to the Spanish marketplace as well. The shipments will be destined for the network, the largest wireless operator in Spain.

In Scandinavia we signed a distribution agreement with Scandinavia in Denmark, to offer the AirCard 750 network card to the Danish marketplace as well as other Scandinavia countries.

Shifting to Asia Pacific, on the GSM carrier in Singapore, and CR Wireless, launched the AirCard 750 wireless PC card modem for PDA's and notebook computers to the Singapore marketplace. We also signed a distribution agreement with Limited to distribute the AirCard 555, our CDMA PC card as well as the AirCard 750, our GPRS PC card, to the New Zealand marketplace.

In China, China Mobile selected the AirCard 750 as one of the GPRS PC cards to participate in a GPRS promotional program spread across several regions in China. And wrapping up the GPRS business development highlights in the U.S.A., on October 7th, so just after the end of the quarter, we announced the launch of our AirCard 750, with TMobile USA, and our plan to offer global roaming capability with this device across TMobile properties around the world.

A footnote, also, on our progress with AT&T Wireless, early in July, as you may recall, we announced a renegotiation of our supply agreement with AT&T Wireless, and by way of an update there, AT&T Wireless has now approved both the AirCard 710 and AirCard 750 GPRS products and volume shipments of the AirCard 710 have commenced.

Wrapping up with other business development initiatives, we were selected as a provider of third generation CDMA 1X EVDO wireless modems for Lucent Technologies' secure mobile data solutions for the enterprise portfolio. This wireless initiative is designed to make it easier for mobile operators to provide enterprise customers with secure and easy to use high-speed wireless access to critical applications, essentially bridging the local area wireless world with the wide area wireless world.

And I'll pass it back over to Peter Roberts.

Thanks, Jason. Our expanded operating line of credit -- this week, the Royal Bank of Canada increased our operating line of credit from $1.5 million Canadian to $10 million U.S. This facility bears interest at 1.25 percent and is secured by a general security agreement providing a first charge against all assets. We have increased the size of our facility to ensure that we have maximum flexibility in meeting our working capital requirements going forward without unnecessary dilution to our shareholders. Given our strong cash position, we do not expect to draw down any significant amounts under the operating line in the near term.

Turning now to our Q4 guidance. Inherent in this guidance is a continuation of the higher-than-normal risk resulting from uncertainty associated with the timing of completion, approvals, and volume shipment of new products. We expect overall economic and industry sector conditions to continue to be challenging. Offsetting this, we have a considerable backlog on our range of new products and new distribution channels.

So for Q4, 2002, our revenue range is 20 million to 22 million. Our gross margins we're guiding to be flat at approximately 36 percent. Operating expenses at 6.9 million, and net earnings at $0.5 million to $1 million, or three cents to six cents per share. Our Q4 cash flow, we're guiding to be neutral, closing at about $32 to $33 million. With that, now, I'll turn it over to David.

Thank you, Peter. I'm going to cover just a couple points -- update points on management and governance before summarizing and moving to the question period. First, on management changes during the quarter, we recruited and relocated to our headquarters location a new Vice President, Manufacturing and Supply, Bill Dodson. Now, Bill was previously the Vice President of Global Operations for Gateway Computers, and prior to that, ran a couple major operating lines for Toshiba America. Bill is now on board with Sierra Wireless and has overall responsibility for all of our manufacturing and supply chain activities.

Turning to corporate governance, of course, this is becoming a fairly topical subject and I don't plan to give a full corporate governance report card here on the call. I know that some of the analysts and publications and other people have been doing that, but I'd like to point out the company's doing pretty well on corporate governance evaluations and we have a very solid existing structure. That being said, I think there is always opportunity for improvement and as a board, we've been looking at those areas and opportunities. Currently, our board is comprised of 7 directors, that's one inside director, myself, as the CEO, and 6 outside, unrelated directors. Our audit company and our compensation committee are each comprised entirely of outside directors. And we've identified and announced today the appointment of a lead independent director, Peter . Now Peter has been on the board for about 2 ½ years. You'll see in the news release, his background. He is a very skilled senior business executive, now a visiting, an executive in residence, I should say, at the University of BC. Previously, he was president of Rogers Telecom, president of Compaq, Canada, and a vice president in Asia in two locations in Asia over a period of a little more than 10 years, living in Asia, with both Hewlett Packard and Tandem Computers. Peter has agreed to take the role as lead independent director and his focus in doing that will be providing leadership to enhance the board's effectiveness, managing the board, keypoint acting as the liaison between outside directors on the board and management, and I'm happy to say that as I was a member of the TSC's, and Canadian Institute of Charters Accounts Joint Committee on Corporate Governance, I'm happy to say that the appointment of Peter as the lead independent director fulfills one of the recommendations of the Joint Committee's reports.

That's really it on management and governance. And I'd like to just to add that one of the other things we are working on is increasing disclosure and making it easier for shareholders to get access to information about the company. Now, we file both electronically and on paper, depending on the jurisdiction and the type of filing, many different document and reports with regulatory authorities, and some of these reports are easy for shareholders to access and others have proved to be difficult for them to access. One area where we've made an improvement is, we've taken the reporting of share transactions, share and auction transactions by directors and officers. We're already fully compliant with all of the regulatory requirements, but on a voluntary basis, we're now reporting those transactions on our investor section on our website. And so that information is being maintained on a monthly basis, so that shareholders have a easy place to find it.

Now, I'd like to move to summary for the call. On an operating basis, I think we've made a lot of progress since we've embarked on our restructuring plan. Revenues were up in Q3 by 25 percent over the previous quarter, this quarter, and up by more than half over the same quarter last year.

Our gross margins are improved sequentially. Our operating expenses were down as a result of the restructuring and we returned a profitability and positive cash flow ahead of schedule. Our revenue growth is coming from our newer 2.5 G products and from expanding our distribution channels and markets including the Americas, Europe and the Asia Pacific region.

Despite a tough operating climate, we are continuing to invest both in current and in future growth opportunities. During the quarter we strengthened the management team and we've made improvements to corporate governance, including the appointment that I just mentioned.

Finally, our first restructuring objective was an accelerated return to profitability. We took some very difficult decisions in our restructuring and we've accomplished that first objective ahead of schedule. I have to offer my appreciation to our employees and to our business partners who worked through some very tough conditions and delivered a very strong performance.

This is the first step in moving the company forward on a solid foundation of both profitability and growth. With that, operator, I'd like to turn it over to our participants for questions.

Thank you. We will now begin the question and answer session. If you have any questions, please press the star one on your touchtone phone. If you are using a speakerphone, please pick up your handset and press the star one at that time.

If your question has been answered and you wish to withdraw your request, you may do so by pressing star two. Please go ahead if you have any questions. Your first question comes from , please state your company.

Yes. CIBC WorldMarkets. Congratulations. Looks like a pretty strong quarter on the top line and the bottom line. I wondered if you could just talk about who some of the top customers are, maybe, disclose the top three customers were in the quarter?

We - this is Jason Cohenour. We actually had some pretty good broad based customer activity in the quarter and that has spread across multiple regions. Some of the strong contributors to the revenue picture for us in the quarter included wireless carriers in North America such as, Verizon Wireless and Tmobile USA, as well as European carriers like U.K.

On the OEM side, we also had a strong contribution from one of our lead OEM customers, Toshiba, for our SB 555 module. Which, as you may know, gets imbedded in their device.

Are you able to say, Jason, how many 10 percent customers you have in the quarter?

No. I'm not. I'm sorry I don't have that information.

OK. And previously, David, you've talked about the differences between inventory build and sell through. And I wondered maybe specifically on the carrier side if you could talk about the differences there and where we're at versus where we're at on each of those two items?

Well, by inventory build you mean channel inventory as opposed to our inventory?

Yes.

OK. Well, we've been rolling out new products over the course of this year. So the answers to how channels are doing on taking product and then on sell through, tend to vary based on when the channel got going with our product and with their service launch.

The channels that we've been shipping newer products to the longest include some of the CDMA carriers in North America, and some of the GPRS carriers internationally. And the pattern we're seeing there is we ship to the carrier, you know, by simple math, the carrier is then building an inventory position. Simultaneously, the carrier is carrying out a market launch program which varies from passive at some carriers to very aggressive at other carriers. And while that's happening, Sierra Wireless, and this is one of our trademarks in the industry, we focus not only on selling to our channel partners, but on selling through our channel partners to end customers.

And so as we ship product to the carrier, and as the carrier conducts their market launch, we're out there engaged in channel sell-through activities to end customers. And perhaps I can just touch on one example that Jason already reported on and illustrate that point. We brought on stream a new product for us, the SB 750, it's a GPRS OEM module, derived from our GPRS PC card. We got design wins for that product with existing OEMs, including Itronix. We simultaneously put the AirCard 750 into the Vodafone U.K. channel, and then, together with Itronix and Vodafone, we won a large enterprise wireless data deployment with Transco, the largest natural gas distributor in the U.K.

And so, there's a good example of us working not only with a carrier channel, but also with an OEM partner, to take a new product all the way through to an end customer sale. I expect that in the months and quarters to come, we're going to repeat that many times over as we go beyond getting carrier approval or product approval in a given market to having the carriers launch their service, the OEMs go to those markets, and our team focus on sell-through to end customers.

David, with many of the networks now in place, I wondered if you could just give us a quick commentary on -- with the pretty widespread in terms of pricing for the data services the carriers are offering, and I wonder if you'd just give us your insight into whether we're at a happy place right now or whether we could see some aggressive changes, as we have, I guess, from some carriers recently.

Well, I think there's probably different -- you know, depending on the audience, for that kind of question, happiness is defined differently. So -- for -- I'm going to stick to Sierra Wireless's narrow view, and we're happy with the kinds of data service plans and pricing and activity that have already been launched by many carriers. And last week, the industry had a significant trade show that -- CTI's Wireless IT show in Las Vegas, and tied in with that show, we organized a meeting of enterprise Chief Technology, or Chief Information Officers, and these people were drawn from large -- in this case, American enterprise companies, who either have already deployed Wireless data solutions to some of their workforce, or who are actively planning to.

And this council of enterprise leaders, one message that came through very clear to me, as an equipment supplier, is that they like flat rate data service pricing plans. Because if you're the technology guy in a large enterprise charged with deploying a new technology to 2 or 3 or 5,000 people who work out in the field, the hardest thing of all is not knowing what the bills are going to be. And so, the enterprise customers love flat rate pricing plans and most of the major carrier partners we are working with offer at least one flat rate pricing plan.

Gotcha, thank you.

Thank you. Your next question comes from Ray . Please state your company.

Hi. It's Ray from . I just want to actually follow up on a couple questions that Barry just asked. The first was, I didn't quite catch the answer on the customer concentration. Is, Peter, did you give any sense as to how many customers there were over 10% or anything along that type of threshold?

No.

So I can take from that short answer, that you mean that there is no disclosure in that regard?

We haven't, we don't normally identify individual customers and the more general question you're asking is how many of them are over a 10% threshold. I think the answer would be approximately 2 and we did not have a prepared disclosure on that point.

OK. No, that's fine. The second follow up from Barry, again, is just on the pricing trendset. David, do you think that we're going to see flat rate pricing for PC cards specifically? Unlimited pricing plans as we've seen, you know with Verizon and Sprint PCS. Do you think that'll proliferate throughout the industry?

Sticking with wireless data services, you mean?

Yes.

I believe so, yes. And I don't want to send, give a misimpression, I meant most of the carriers, if not all of them, also have variable rate pricing plans. And for some customers and some applications, a variable rate pricing, service pricing plan is the desired option. so the real trend you should be expecting is that large enterprises like the predictability of flat rate pricing plans that they can negotiate at an enterprise customer level and that there are other customers and certain applications where variable rate pricing makes a lot of sense and it will prevail as well. So that the trend, to try and answer your question, I think the trend in the industry will be for each major carrier to offer a suite or portfolio of pricing plans for wireless data that include both variable and fixed options. And in that respect, I'm really predicting that things will evolve to be much the way they are on the voice side of the business.

And could we derive from that comment that even without the availability of publicly stated unlimited pricing plans or whatever you might want to call them, the carrier could negotiate directly within enterprises for such plans?

Well, I don't believe that the carriers operate under any regulatory or legislative bar that stops them from doing that and those large customers that they might consider negotiations with like that they already work with on that basis with voice services. So I don't think that there is any reason to believe carriers wouldn't have already been doing customer specific negotiated pricing plans for years. And that they would continue to do that in the future.

Just the last question and I'll circle back and let someone else jump on, but just on the launch recently up there at that specific customer's price point of $1,225. What's your take as to, not specifically on Bell Mobility, but just in generally on the industry as to how we can get these device prices down?

What would be required and whether or not you think that there will be a trend a la the pricing discussion we just had on data itself, but on devices where we may actually see these devices get subsidized to a greater extent? So kind of bundling that all together, how do you think we're going to be - how do you think we're going to get there to lower priced devices?

Well, I think the first thing to understand for many of the customers in the industry, the target market for wireless data devices and services and applications, is actually the enterprise market. At the CIO conference I was at last week, they estimated that the average - CIO's look at something called total cost of ownership, not just the purchase price of the device or the monthly bill, but training application, support, everything.

And one of the CIO's had a very carefully considered presentation in which he showed that in his organization, his large enterprise, the average - the, sorry, the total cost of ownership of a Palm handheld device that wasn't wireless over a four year period was $3,500 U.S. And he wasn't presenting that data to show that the devices were too expensive, simply to show that that's what it costs to put that class of device in the hands of a mobile worker over the full life cycle of the device or the application.

So what I'm trying to present to you is that although its popular to focus on the service pricing or the device pricing when people are trying to see how to get these kinds of devices to teenagers and youth markets and consumer markets all over the world, most of the focus of wireless data industry participants is on serving enterprise markets where there's a demonstrable return on investment even at today's service and device pricing.

So I know - am I answering a different question than you asked, but I'm trying to offer a view by doing that. The devices and services are already compellingly priced for many enterprise applications and that's where we expect adoption to continue. As far as getting to lower service prices, I think that will be a function of competition. Lower device prices require relentless focus on tighter and tighter integration between the design of the PDA and the design of the wireless functionality that goes into it.

And they also, frankly, require orders of magnitude higher unit volumes in order to follow the same kind of price and cost and volume curve that the handsets or cell phones already do.

OK. Thank you.

Thank you. Your next question comes from Andrew Lee. Please state your company.

Peter, was there any inventory sold in the quarter that was previously written down by any significant amount?

No. There was not, Andrew.

OK. Was the book to bill in the quarter, bigger than one, I think you mentioned that last quarter.

Book to bill in Q2 was greater than one. Book to bill in Q3 was slightly under one. We're not especially concerned about that as a leading indicator because we've been shipping - during Q3 we've been focusing on getting these new products shipping to a whole number of new channels for whom we had previously booked their orders.

That is, in Q1 and Q2 and previously.

And also on your Q2 call, you talked about Sprint and AT&T being less than 10 percent. Is it fair to assume that Sprint was actually below your initial expectations, given what you said were logistical issues in shipping to the channel?

Well, I think if you are recalling there that we said Sprint would be less than 10 percent of the quarter, and that's come true. And I think we'd prefer not to comment on individual carrier counts at the expectation level. We certainly -- Jason outlined that we received Sprint's approval, we commenced shipments, and we had some logistical issues with getting up to higher volumes. We're expecting that to occur in Q4. Now, one thing I'll add to what he had already mentioned is that we're aware of a building order backlog of end customers at Sprint, specifically for the Sierra Wireless AirCard products.

OK. And any comments on the timing of your 750 with AT&T Wireless?

We received AT&T Wireless's approval on the AirCard 710 and commenced volume shipment on it early in July, or mid-July. We received approval on the AirCard 750 quite recently and will commence volume shipments on it in the near future, again, specifically to AT&T Wireless.

OK, I think Jason mentioned TMobile USA was a good customer in the quarter. Do we assume that you began shipping before September 30th to get them up and running in early October, then?

Yes.

Absolutely.

And one point on the , can you contrast, maybe -- not absolute numbers, but how is the CDP OEM shipments versus your 1X shipments, and the same put on the PC card side? I'm trying to get a sense as to how much of that business is being, I don't know, reduced sequentially?

Yes, CDMA shipments on both OEM and PC card are declining quickly. And you will recall, back in June, one element of the charges we took in our restructuring was to address having excess CDPD-related inventory and supply commitments, given the fact that at that point in time, our forecast for CPDP demand from our channel partners were tailing off quite rapidly. And what we've seen since then is those forecasts have come true. That is, demand is tailing off fairly rapidly.

OK, last question. David, how would you assess what the Taiwanese manufacturer is doing with the box PC phone addition on the GPRS side? It seems like HTC is able to put out a product at a $500 ASP relatively cheaper than what Sprint and Verizon are doing with . Is that now, after you've had a couple of months to assess the competitive front, your biggest threat toward getting additional OEM PocketPC business?

Well, as flattering as it would be for the to be our product, I have to give credit where it's due. It's actually Toshiba's product. For the rest of the callers, we supply an OEM module to Toshiba who embed that in the PocketPC, and take it to market with both Verizon and Sprint. The existence of Taiwanese ODMs, as they're called, starting to make PocketPC class devices and phones is an emerging trend in the industry and I don't think it you know, bears, that it clearly bears one way or the other on where our OEM opportunities will go. To illustrate that, on the one hand we can sell modules to companies like Toshiba who have time to market and functionality objectives that are different than the products being made by the Taiwanese ODMs and on the other hand, we're mindful of the accomplishments, the considerable accomplishments of WavCom selling GSM modules into the Chinese handset market, which arguably is one of the most price sensitive markets in the world. So I think, I don't think you can draw any clear conclusions one way or the other on module opportunities by looking at the Taiwanese developments.

OK. Great. Thank you.

Thank you. Your next question comes from Gary Baker. Please state your company.

Guys, I'm sort of following up on Barry's initial discussion and would you care to give us any sort of ballpark idea, and I'm addressing the issue of sell-through versus channel inventory build. If you look at the quarter and you looked at your 2 ½ G shipments in the quarter, do you have any sort of ballpark idea as to, in terms of how much of that would be just, at this point, filling the channels and how much of that product would actually be sell-through?

Well, we track end customer sell-through our channels diligently. But the challenge right now in trying to address that question and it's a very important question is that some of our channels have been on stream with new products for a couple quarters and for those channels we have a pretty good idea of sell-through. Other channels, we've just commenced shipments to and often, as Jason outlined there, new channel partners for us in new geographic markets around the world and so their launch of a new service and our launch of a new product does not have a whole pile of historical data on which to base sell-through trends or to take a one or two weeks or months worth of sell-through data points and try and trying to turn them into a trendline. So frankly, where we can see sell-through trends emerging is at the carriers we've worked with the longest and who have had the new products the longest and I would characterize those trends as encouraging. And that's on the good side. On the bad side, or the unknown side, we have quite a number of new carrier partners and channel partners and new products for whom we don't have established sell-through trends yet and we'll have too see. Frankly, given how strong our Q3 was, and it was an unusually strong Q3, compared to history, we have set out Q4 guidance to reflect that fact that we do not want to push product into channels before sell-through patterns have been established.

OK. And on the backlog, can you give us, you is less than 1, I mean, could you give us any sort of breakdown on your current backlog?

We don't provide breakdown of backlog. What we do, though, is publicly announce material contracts and material changes to those contracts and so the major elements of our back log are publicly known and that said, we do not predict a back log breakdown. But frankly, I'm not aware of any other companies in our immediate sector who do that either.

OK. One last one. On the gross margins, they came in I guess a little higher than you had guided to last quarter. So that 36 percent you're guiding to flat gross margins again. If we look out to next year, then, is that sort of the level that you think is sustainable?

Or - because previously you obviously had a higher gross margin expectations.

Yes. Our target business model continues to be a higher level of gross margins on the order of 40 to 42 percent gross margins and we're not executing there yet. We made some good progress on that in the last quarter.

We're forecasting flat on gross margin in Q4, simply because our gross margins are so dependent on mix. We have lower gross margin OEM products, higher gross margin PC products and how that comes out in any given quarter's a function of product mix.

Over the longer term, we're working on improvements to our average selling prices and to further reducing product costs, and we made some good headway in that in Q3. But we've got more work to do on reducing product costs and so over time and with increased volume we expect we will improve our gross margins towards our target model.

OK. And one last one if I can. The - you were cash flow positive in the quarter. You've got a decent cash position. Now you've had this announcement there's an increase in your line with the bank.

I'm just wondering, are there - as we look at the next year if we were going to have, sort of, sustainable run rate of positive cash flow next year, what would appear you would need to use that line. Are there any sort of plans to bump up your R&D or anything next year that would cause you to dip into that increased line?

Well I think I tried to be clear in my closing comments in the summary, having struggled our way back to profitability, the goal of the company and relentless focus of the management team is going to be to keep the company profitable and to grow it on a profitable base.

So that's our game plan. Within that game plan, we have no known events that would cause us to require more cash whether that's equity or debt.

OK. Thank you.

Thank you. Your next question comes from Deepak Chopra. Please state your company.

Hey guys. Great quarter. David, maybe if you can just talk about the SB 750? You guys haven't talked about that too much. You guys haven't officially launched it with a press release in terms of product launch.

I was just wondering if you could talk a bit about that and what are the PDA opportunities that you're starting to see with that product line come to fruition?

Well, the SB 750 is a little bit of a different animal from some of our other OEM modules. It is a OEM packaged version of the AirCard 750. So its form factor is closer to PC card than to the core wireless engine form factor of our other OEM modules.

And as such, the SB 750 is targeted not at handheld devices but at larger devices like notebooks and other rugged computing devices that have a PC card space. Now, typically, not a PC card slot externally, but built inside the device.

Although we didn't make a formal product announcement, we certainly did make a public announcement with on the design win and on accomplishing that design win and customer win with Vodafone and Transco. So I do believe we've got the awareness of that product in the public domain.

Our gameplan for that product is really to focus it on larger form factor devices and many of our existing and prospective OEMs who need a tri-band GPRS solution for world markets.

Do you see extending that down into the core wireless engine, or is that something you're not willing to talk about at this point?

Well, it's a maybe, as it's been for a while. We've been saying that our entry into the -- an entry into the GPRS OEM space would be differentiated, that we wouldn't just dive in that space and offer the same thing as everyone else, so we were looking for the right business case and the right opportunity to differentiate, and the SB 750 is an example of that. It is well-differentiated from other GSM, GPRS, OEM devices that are available.

As far as moving down to the smaller form factor and tackling the smaller devices, that's still a possibility, and we still look for the right opportunity and the right competitive position to do that.

Maybe then you could talk about in terms of your research in development -- what are the new product initiatives that are underway now, or maybe you can just -- even us in terms of what's the product landscape for you guys over the next six to 12 months.

OK, I think after two or three years of truly massive investment, not only by our company, but by our whole industry, in bringing the new 2.5G products to market, and the parallel fact that in most markets, the 3G networks and investments are some way off, it'd be natural and most of our R&D focus now is on taking the 2.5G products we have and feature enhancing them, differentiating them, creating product variance for various core markets, and basically maximizing the opportunities and the return on our investment in those technology platforms and those products.

And so you just asked me a number of questions about the SB 750. It's an excellent example of that. We built a GPRS product platform. Our first product out was a tri-band PC card, second product out a single-band PC card, third product out an OEM module, all variants of the same underlying product development program. So most of our R&D is currently engaged in those kinds of feature-enhancement, differentiation, and product variant for our various core markets. Those are our major activities. Now, beyond that, we do have a significant portion of our research budget going into new initiatives that are aimed at high growth opportunities but -- that are farther out, you know, that have a longer horizon on them.

And those are -- it's just too early to talk about those, yet.

OK, fair enough. Couple quick questions for Peter. In terms of the expenses, are we going to -- after Q4, are we going to maintain these type of levels or are we going to drop closer to the, sort of, 6 million market. And as well, could we get an updated headcount as well? Thank you.

The -- going to the headcount, the headcount's right around 180. In dealing with the op ex, we're -- we've given guidance at our June 24th call on the restructuring, and a key point we made there if you will recall was making sure we have sufficient cash to take advantage of any opportunities that we see in the marketplace and also to grow our business as our revenue grows and as the market dictates. We're continuing to do that. That is our plan. We continue to focus on managing op ex and also on managing cash.

OK. And so, it'll around these levels, then?

To interject, I think excluding a small amount of carryover on restructuring, our Q3 op ex was 6.6 million, we're guiding Q4 op ex at 6.9 million. It's in that zone that you should expect our op ex to remain until we see significant and continued top line growth sequentially.

Thanks.

Thank you, your next question comes from Tim Luke. Please state your company.

I was wondering, David, if you could commented on how you saw the linearity go through the September quarter and if you have any comment on how October has been?

Well, in fact, you know, we often experience more backend load quarters than we like, more backend load in our quarters than we like. Q3 was interesting. It was a stronger than typical Q3 for us. And we saw good strong start right out of the gate in July. August was weaker and then September was strong again. So that was the pattern we saw during the quarter. It's an unusual pattern but that's what we saw. As far as October, you're inviting me to jump in the deep end of the swimming pool. It's, we're actually reporting on last quarter, not this one, but I'm, I think that Q4 looks like it's going to be more linear or more level and less backend loaded than some of our historical experience, but of course, it's pretty early in the quarter to get any real sense of that yet.

I was wondering, for, Peter, on the cash, do you, how do you see the operating cash flow level as you go through the December period and where do you think the cash balance would be as you exit December?

As we said in the guidance, Tim, that we're expecting our cash position to be neutral and given the range of 32 to 33 for the end of the Q.

If you generate some net incomes, does that infer you know, there could be some sort of, that there is some, sort of investment that's going on in the quarter?

The real factor that's in there, Tim, is working capital in fact, in the, as I mentioned, trade receivables DSO is down this quarter and we've had some very good cash collections and we're seeing in Q4 that there'll be increase in receivables and possibly increase in inventory. That will have, therefore, bringing us to an unusual cash position.

OK. And then, just on the head count that you just mentioned, we've largely through the reduction and the head count or would it move a little bit lower as you go through this fourth quarter?

We're through our reduction and head count. Although, we do have a handful of people left, I think 5 people that are currently on a retention or working notice program. They are all identified and already working to wrap things up.

Great. Congratulations guys on the quarter.

Thank you.

Thank you. Your next question comes from Gus Papageorgiou. Please state your company.

Scotia Capital. Congratulations on that quarter. Just want to focus on Europe a little bit. Sequentially, revenue in Europe increased by about 71, 72 percent which is very encouraging.

Just want to focus on the top six wireless carriers in Europe. For and Tmobile, what's the potential to extend your relationship with those two carriers? For example, for going outside the U.K. and for Tmobile, putting your relationship from the U.S. into Tmobile's geographies into Europe.

And then for Orange and , what's the potential of engaging those four as customers in the near future?

I'll respond to that, Gus. This is Jason. Your numbers on European growth are actually pretty straight on. So we did experience excellent growth from - sequential growth from Q2 to Q3.

Our approach to selling to the European carriers is, you know, as you can tell. I mean, starting with generally the major or lead carriers such as U.K., and leveraging that platform to try to penetrate the other affiliates in other countries. We are actively doing that.

It's part of our account strategy. As it relates to Tmobile, Tmobile Germany and Tmobile U.S.A., you know, we will probably do a bit of a reverse there. Right? we'll try to leverage the success we've had here in the U.S. to penetrate the headquarters location in Bohn. And we're actively doing that.

You know, one of the advantages to working with carriers who have multiple affiliates around the globe is you can establish an account relationship, you can get your devices approved on the network and use that as a stepping stone. Use the success there, and not just, by the way, getting your devices certified but also real life business success like closing deals within customers.

And use that as a leverage point as you penetrate the other operators and we're actively doing that.

Just help me out. In terms of how the whole process works for , for example, do you have to go country by country to get approval? Or would just kind of say, OK, your approved for the rest of the network and then you would be marketed through all their geographies? Or how does that work?

I'll state what we see as the trend, and then quickly follow by saying the trend has not yet been achieved by most carriers. Where most carriers want to go is where they have a couple of key central functions at a lead opco or at a headquarters location and that is network certification and things like procurement.

Right? To get leverage out of that. I think it's safe to say that none of the carriers are quite there yet, although, what we are seeing is once we get certified in one opco in a region, it's a much more accelerated process once you get to the second, third, and fourth opco's.

So it's kind of a tiered approach, if you will. You get approved at the headquarters location and the second and third ones are a little bit easier because they have seen that successful track record. But nonetheless, you still have to go there and do some level of certification in the regional opco.

OK. Great. Thank you very much.

Thank you. Your next question comes from . Please state your company name.

. David, understanding on the R&D that you're going to refine the existing GPRS and CDMA 1X products to maximize your return on investment there. Just wondering what the status is of 1x-EVDO and how much of a focus of effort that is, presently, and when you see both the demand for that product for commercial volumes of that product, and your readiness to deliver that.

OK, that's an excellent question, because we didn't focus on that in our update today. One of the areas where we have been doing, you know, development investment for future growth beyond our current portfolio is in the CDMA 3G track, and specifically 1x-EVDO. We have previously talked about and disclosed the fact we're working with Lucent on EVDO. Lucent's one of the major infrastructure providers who are developing EVDO infrastructure, as is Nortel. And those infrastructure providers have been supplying EVDO infrastructure, you know, early, pre-commercial infrastructure to large CDMA carriers for trials, and in conjunction with those infrastructure providers and carriers doing the trials, we've been supplying AirCard 575s, and I'm saying that, even though it's not an announced product. We have AirCard 575s, which are 1X EVDO AirCards. They actually have two antennas for diversity reception and transmission, it's a feature of EVDO products.

And those AirCard products are pre-commercial, they're prototypes, but they are fully form factor compliant. They fit the PC card form factor and are operational and in lab testing, we've seen speeds with our infrastructure partners well over one megabit per second on that class of product. We're not talking about that class of product a lot to our commercial marketplace now, simply because infrastructures aren't yet commercially deployed, and we haven't gone from prototype to full commercial product release yet on that product. To the rest -- to the obvious question, the rest of your question on timing, I think the first commercial deployments of EVDO infrastructure in North America are likely to occur during 2003 and the prospect for large-scale EVDO deployments in North America -- large and wide-scale deployments on a commercial basis, isn't any earlier than 2004.

And so our product introduction, when we do decide to go from prototype to a commercially available product, it'll be timed to coincide with the availability of significant commercial service offerings. Now -- and just for complete -- for completeness, I'll also mention that EVDO infrastructure is up and running commercially in Korea, and we see that as a potential market, although it's proven very difficult to enter that market.

And in terms of EVDO product development as a percentage of effort of the overall R&D effort, since it seems like it's stretched out here over a fairly long horizon, should we assume that it's a small percentage of the overall effort? And also, finally, last question, your outlook or expectations for developing edge product?

OK. So starting with your first question, EVDO is a relatively modest percentage of our R&D spend right now and that's particularly aided by the fact that we've been receiving R&D funding from one of our strategic partners to off, to defray the costs, our costs of that development program. So, it's fair to say that it's a relatively small percentage of our total R&D spend on a net basis.

Turning to Edge, Edge is a technology, one of the technologies that is on the GSM, GPRS network operators migration path. It's being, it's planned to be deployed by service providers in North America, including AT&T Wireless and I believe Singular, and it's a area where we've already done considerable R&D investment in the past. We don't have anything new to talk about on Edge here today. And whether and when we would bring an Edge product to market, we'll very much parallel the rationale I just gave on EVDO timing and that is it all depends on whether and when we see widespread commercial deployment and service offerings by the major service providers. We're certainly in a position to commercialize an Edge product and go to market if the actual market opportunity presents itself.

Thank you for taking the questions and congrats on the rapid cost restructuring.

You bet. Well, thank you very much.

Thank you. Your next question comes from Glen Tracy. Please state your company.

Guys, just a couple questions. First on the OEM business. Obviously you had a strong quarter. I'm assuming a fair bit of that was with the deal. But I'm just wondering if you can comment on what you're seeing in the OEM space for the 2 ½ G products relative to strength in the AirCards.

Right. Well, OEM was 26% of our 20.1 million this quarter, so just a hair over $5 million out of our total results. We saw, as Jason mentioned earlier, some pretty good uptake with Toshiba on FB 555s, which are CDMA OEM modules. We're also getting a number of design wins beyond Toshiba on both the CDMA OEM product and on the GPRS SB750. So, OEM looks to be on 2.5G products a good opportunity set. That being said, it's always been a lumpy business. You know, some quarters, OEM shoots up in dollar and percentage of our total business terms and in other quarters, it's down, so it's worth understanding that it's one of the biggest swings in our mix, quarter to quarter and frankly, it's also one of the biggest swings in our gross margins each quarter because OEM products with their much lower sales and marketing expense also gets sold at much lower gross margins.

Would you say based on the visibility you have into your sales pipeline, can you give a feel for how you'd see the market for OEM versus AirCard, you know, kind of a year out or something like that in that kind of time frame? Do you see it shifting more towards OEM over the next year or so or do you think there is going to be a fairly steady mix of business relative to what you're seeing right now between OEM and AirCard?

You know, that I'd like to answer that, and I think the honest answer is that it's very difficult to see where the market's going to go a year or more out. Right now we're seeing 2.5 firing on all cylinders, and lots room for continued expansion of channels and geographic presence, and then for success with the development of end-customer sell through. On OEM, we've been having--we've had a number of strong quarters on OEM. There is more customer-concentration risk in our OEM business, and therefore it's lumpier, and I think a year out, OEM will have grown, will have grown, and the hard thing to call is, what's the relative growth? And that part of it I'm just going to leave as a question that's tough. The one other thing you might want to think about on that, and that we've been pondering, is tend to be a proxy for wirelessly enabling notebooks, and the penetration of that class of device, and OEM modules tend to be a proxy for wirelessly enabling PDAs and other handheld devices, and so they are a proxy for adoption on that class of device. And if you've got market research or opinions on the relative uptake on wireless notebooks and wireless handhelds, that could help answer the question of which one of those two product lines would grow the quickest.

Right. And I guess I also look at what other companies in your space are doing, and it seems like there's a fair bit of concentration on new product development in the OEM space. Perhaps not quite so much in the form factor space.

Right.

Would you agree that you're seeing the same thing?

I think that's a reasonable observation, and frankly, we're already the dominant supplier in PC card space, so it probably doesn't look as attractive for people to enter in, you know, for new entrants. On the OEM module side, it's both an area where there are other significant competitors already there, including us, but other people as well, and it's a space that perhaps is more virgin territory in many ways, and so that's why it's so hard to predict, because it's really tied to the introduction of wireless-enabled handhelds, and then the market's adoption of the--of that class of devices. That's the hard--the hard part is not noticing that there's--that there's opportunities there, but in fact, figuring out, you know what the uptake's really going to be.

Right. Okay, I'll just switch gears for a second. I'm not sure, can you give any more clarity on the types of logistical constraints you saw with delivery to Sprint? Was this channel related, or product manufacturing related, or you know, can you give a little more clarity there?

Well, we had--I probably won't be able to clear it up much for you, but we had elements of both. In working with large carriers in general, we're not only working with the carrier, which everybody focuses on, but also with reseller channels that are associated with those carriers, and so there's quite a lot of work to get all of those things up and running effectively and smoothly, and sometimes there are some challenges in doing that. We experienced some of those. On the internal side, we also have a pretty strong trend line underway in devices, and our, you know, ramping supply capability, and working through supply chain constraints. As I don't need to tell everyone on the call, there's been huge fallout from the -- the bubble, if you will, in 2000, and then the burst in 2001. And we're now growing our revenues, so this is I believe our third quarter in a row of top line improvement. And so we're taking our supply chain back up the volume ramp, and of course everyone's -- including ourselves, once bitten, twice shy. We're moving carefully.

tracy Do you have any idea when you expect the product to be available on Sprint PCS's Web site again?

Well, it -- whether or not it's available on their Web site at any given moment is largely a function of their stock position at that moment, but we certainly have active end customer selling activities underway, and those end customers placing Sierra Wireless AirCard purchase orders on their suppliers, and by inference, on Sprint. And we're shipping product to Sprint, so I think you should be thinking of this as a shortness of supply rather than an absence of supply when you're looking at what the current situation is.

OK, I'll just ask one more question on that one. I'm just curious, do you expect Sprint to enable the voice capability on your product as a differentiator from other solutions that they're offering?

We're unsure at this point in time.

OK, but I assume you might be working towards that with them. Would that be fair?

That's -- you know, the device is inherently voice capable.

Right.

And if Sprint chooses to take advantage of that feature, we're more than pleased to deliver it, but it's really up to them.

Right, OK.

It's actually -- one element there -- their latest pricing plan moves will certainly afford that opportunity, because they're making it easy for people to combine voice and data services under a single account and single billing plan.

Right. And just one financial question. The restructuring charge that was mentioned was 0.2 million in the quarter, and I think there was guidance at the end of the last quarter that you expected about 0.6 million in rollover restructuring charge. Can we assume that point -- the additional 0.4 million has kind of gone away and is not going to happen or should we be looking for a little bit more in Q4.

It's probably gone away is the best .

OK, thanks, Peter. Thanks very much, guys, and congratulations on the good quarter.

Thank you very much.

Thank you. Next question comes from . Please go ahead.

Hi, it's UBS Warburg. I'm just wondering, Peter, if you could comment on how you think your working capital is going to work in '03, do you see that that is going to be a hampering on your cash generation in '03, and maybe you can just talk about your targets on inventory turns and DSOs and whatnot.

Well, first of all, , we are not providing guidance any further out than this quarter into Q4. If you recall from the restructuring exercise you went through, our objective was to return to break even at first and then to profitability, and the same with cash flow, and into positive cash flow. We have that objective and determination. We've raised the bar in terms of collecting our receivables and DSO. I said earlier that, you know, the DSO is reduced, but we had a particularly good quarter this last one, and frankly, I don't see us maintaining that level of DSO going forward, but staying well below the 75 days of target. In terms of inventory, we're consciously managing our inventory and we do not expect ourselves getting caught in the way we have in the past. So therefore, working capital, I see no reason that we should not be able to achieve what we've been determining, i.e. operating break even into profitability and cash flow into next year going forward.

OK. That's good. Just one more question. David, you've talked about I guess, an undisclosed research project. Could you comment on that now and provide any details on what it might actually be and if there's any progress on it?

Well, I almost by definition, I can't. I mean, I'm taken aback a little bit. The only R&D program we have underway are the ones that I broadly outlined. That is, two major categories. One is rapid feature enhancement differentiation and product variants on our 2.5G products and that's the bulk of our current R&D. we then have a significant portion of our R&D, a significant minority portion of our R&D going into investments for future growth. One of those that we characterized in some detail a few minutes ago was our work on 1X CBDO and there are others and those others, I guess, would fall in the category of undisclosed R&D programs and I plan to keep them that way until we get a lot closer to commercial introduction.

OK. That's fine. Thank you.

Thank you. Your next question comes from Chris . Please state your company.

Hi guys. Good quarter. Wanted to just ask a couple of questions. I think a lot of it has been already answered, but it would just review a few things. So the cost structure going to 6.9 million on op ex, I guess the assumption here is that you have business opportunities that you want to take advantage of and hence, the increase from the original expectation of 6 million?

Yes, that is correct, Chris.

OK. And then, in terms of the SB555, I think the previous question touched on it a little bit, but can you tell us if you've had any recent design wins in the last couple of quarters on the SB555 or is it really still mainly that they're as well as some other real embedded tough book type of applications?

We've got some more design wins for the SB555 typically, they're in specialized product categories. We're certainly seeing good design win progress on that platform and frankly, I think, despite lots of other positioning from other industry participants, we're the first company to actually ship a dual band 1X embedded module and get it approved on major CDMA networks like the Verizon and Sprint networks. So for OEM customers who are risk adverse in, by their very nature and who have you know, long development cycles of their own and their desire to get the product to market, the SB555 is a very competitive and compelling offering. It's not just the module, it's the accompanying software, it's the fact that it's network approved and infrastructure approved, it's dual band and it's already commercially shipping.

OK. So these types of specialty applications you're talking about, I'm assuming that there are customers who would never, ever think of traditionally designing their own radio equipment?

That's not always true. That's sometimes true, but some of the companies that make industrial and rugged handheld devices, for example, make quite a bit of their own radio equipment. For example, in the 802.11 wireless LAN area, many of them make their own equipment, and at the same time, some of those companies buy modules for wide area solutions such as our SB 555.

OK, and the last question is, just with respect to your channel partners reordering product, we were talking about sell-through earlier on the call. I was wondering if you could comment on any of the customers who you have who have been shipping or taking AirCards for the last one or two quarters. Those ones who you do have a bit of pattern of sell-through on. Are you getting reorders from them, at this point in time?

Well, we are -- not -- I wouldn't say it's broad-based yet. But we have seen some reorders from some channels, not only in the carrier space, but also in the OEM space.

OK, thanks. That's all I have. Thanks, guys.

Once again, if there are any questions on the phone lines, please press star, one, at this time.

Mr. Sutcliffe, there are no further questions at this time, sir.

Well, operator, thank you very much. And to all the attendees on the call, we very much appreciate your time today, and if you have any further questions, we'll be available, as usual, by telephone. Thanks very much.

Thank you. This concludes today's conference call. Please disconnect your lines and have a great day.