司亞樂 (SWIR) 2002 Q4 法說會逐字稿

Good afternoon, and welcome to the Sierra Wireless fourth quarter financial conference call for January 30, 2003. Your host for today will be David Sutcliffe, Chairman and CEO. Mr. Sutcliffe, please go ahead.

Thanks, Operator, and good afternoon to everyone on the call. This is the Q4 results call for Sierra Wireless, and of course it's also our 2002 fiscal year end. With me here at the company's offices I have Peter Roberts, the Chief Financial Officer, and Jason Cohenour, the Senior Vice President of Sales & Marketing.

Peter is going to start us off, as usual, covering forward-looking statements and Q4 financial performance. Jason will be covering the Q4 business development, Peter will cover guidance, and I'll summarize. And then we'd be happy to take any questions that come out of the call. So with that, I'll turn it over to Peter.

Thank you, 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, channel inventory and sell-through, revenues, gross margins, operating expenses, profit, and further 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 meet defined specifications. In light of the many risks and uncertainties surrounding the wireless data communications market, we cannot assure you that the forward-looking statements discussed will be realized.

Turning to our financial results, I'd like to remind everybody our reports are resulted in U.S. dollars and in accordance with U.S. GAAP. We have some adjustments and presentation changes which we'll detail in a moment. On a net effect, on net profit basis, they are immaterial.

So, our Q4 results on a U.S. GAAP basis. Fourth quarter revenue was $22.5m, better than expected. Net earnings of $1.3m were also better than expected. We were cash flow positive by almost $2m for the quarter, and this is better than expected.

The Q4 adjustments I referred to. We had substantially completed our restructuring program at December 31st. During the fourth quarter, we recorded an additional net inventory write-down of $1.9m. A net recovery of $.3m primarily related to lower estimates of fixed asset write-downs on a high charge for facilities. We have settled with the reorganized debtor of Metricom, and have recorded a positive recovery of $1.8m.

In order to align our treatment of research and development funding with the currently preferred accounting presentation, we are now recording certain research and developing funding arrangements as revenue rather than as operating expense relief. In the fourth quarter, each of revenue, gross margin and net R&D expense is increased by $.3 million dollars under this revised presentation. There was no change to net earnings. The information we'll describe as adjusted excludes these restructuring, recovery and presentation amounts.

For our financial performance on a sequential quarter basis, Q4 2002 compared to Q3 2002. Adjusted revenue grew to $22.2m from $20.1m, an increase of 11 percent. Revenues grew as a result of increasing our 2.5G AirCard sales in North America, Europe, and the Asia Pacific region. Adjusted Q4 gross margin percentage remained unchanged at 36 percent. Adjusted Q4 operating expenses were $7m compared to $6.8m in Q3. The increase is as a result of the variable costs related to increased sales, as well as an increase in insurance premiums.

Adjusted Q4 net earnings were $1.1m compared to $.5m in Q3. Adjusted Q4 diluted earnings per share was 6 cents, compared to 3 cents in Q3.

Our financial performance of fiscal 2002 compared to fiscal 2001. Adjusted revenue increased to $73.4m, from $59.7m, an increase of 23 percent. The increase was the result of sales of our 2.5G products, as well as expanded distribution channels in Europe and the Asia Pacific region. Adjusted gross margin of 34.2 percent in 2002 compared to 39.6 percent in 2001. This decrease was the result of changes in our product mix and new product production costs. Adjusted net loss of $5.8m in 2002 compared to an adjusted net loss of $10.3m in 2001. Adjusted loss per share of 35 cents in 2002 compares to 64 cents in 2001.

Switching to our segmented information, our revenues by product segment. Fiscal 2001, MP was 13 percent. In 2002, it was 11 percent, and in Q4 of 2002, it was 6 percent. The AirCard, 65 percent in 2001, 60 percent in 2002, and 72 percent in Q4 of 2002. The OEM line, 16 percent in 2001, 26 percent in 2002, and 19 percent in Q4 of 2002. And Other, 6 percent, 3 percent, and 3 percent respectively. Our [AirCraft] [phonetic] sales continue to be strong in this quarter.

Revenue distribution channels. Carriers for 2001 were 32 percent, 46 percent in 2002, and 54 percent in Q4 2002. Value-added resellers were 47 percent in 2001, 26 percent in 2002, and 23 percent in Q4 2002. OEM's were 17 percent in 2001, 26 percent in 2002, and 22 percent in Q4 of 2002. And direct sales were 4 percent, 2 percent, and 1 percent respectively. So our three major indirect channels continue to be strong. We should expect private and channel segment percentages to fluctuate quarter to quarter, based on mix.

Geographic segment information. The Americas in 2001 was 97 percent; in 2002, was 87 percent, and in Q4 2002 was 86 percent. Europe was negligible in 2001, 7 percent in 2002, and 5 percent in Q4 of 2002. Asia Pacific was 3 percent in 2001, 6 percent in 2002, and 9 percent in Q4 2002. Our international sales was 3 percent in 2001, 13 percent in 2002, and 14 percent in Q4 2002. So our Americas business continues to be strong, and international is growing very nicely.

Turning to our balance sheet and comparing this [technical difficulty] to December 30, 2002, cash and short-term investments increased by $1.9m to $34.8m from $32.9m. This increase is due to cash generated from operating earnings and working capital close. Trade accounts receivable DSO decreased to 40 days from 48 days in Q3. This is well below our old target of 75 days. Net inventory decreased to $6.7m from $7.4m. CDPD inventory is now less than one-quarter of this amount. I will now turn it over to Jason to comment on business development.

Thank you, Peter. I'm going to cover a few of the significant business development events in Q4, and I'm going to start with our CDMA line of products. First, together with Sprint PCS, we announced the commercial availability of the AirCard 550 single band CDMA 1X-PC card for use on Sprint's Vision network, Following that up along with Sprint, we also announced with partners Citrix Systems and Ingram Micro, a bundled solution for the corporate enterprise that includes an AirCard 500 and Citrix software. This bundle is earmarked to be sold through Sprint's Business Solutions program.

The AirCard 555 dual band CDMA 1XPC card product, together with Verizon Wireless's Express Network, was recognized by Network World Magazine with a Best of The Tests Award in the Cool Tools Hardware category. And on a related development with the AirCard 555, we announced that an existing distribution partner of ours, Global Wireless Data, will take on the AirCard 555 for Verizon Wireless's Network and resell the product to system integrators and bars across the U.S.

And then finally, in CDMA, we demonstrated a prototype of our next generation CDMA 1X EB-DO AirCard, along with our partner, Lucent Technologies, and that demonstration featured laptop users roaming seamlessly between CDMA 1X EB-DO networks and 802.11 WiFi networks.

Now, switching to GSM and GPRS, I'll begin in the U.S. We announced with TeamMobile USA the commercial availability of the AirCard 750, our tri-band GPRS PC card, for use on TeamMobile's GSN/GPRS network. This announcement featured the AirCard 750 working on both the TeamMobile USA network and also roaming to other TeamMobile networks in Europe. On a related announcement, also with TeamMobile and solution partner Checkpoint, we announced a corporate enterprise solution bundle that incorporates the AirCard 750 and Checkpoint CPN client software. This bundle will be distributed through TeamMobile's business channels.

We also launched the AirCard 750 with KPN Mobile in The Netherlands, and announced the availability of the AirCard 750 in Belgium and Luxembourg via a new distribution relationship with Multicap.

And then finally, as a general business development event, we signed a North American distribution agreement with TechData to distribute both our AirCard 500 and AirCard 700 series of products to their bars and system integrators.

And with that, I'll turn it back over to Peter.

Thanks, Jason.

Our Q1 2003 guidance. Inherent in this guidance is a continuation of the higher than normal risk resulting from uncertainty associated with timing of volume shipments to channels, and with the rate of end customer adoption of new products. We expect overall economic and industry sector conditions to continue to be challenging. We expect CDPD sales to continue to decline to below 10 percent of revenue, while 2.5G sales continue to grow. We also expect sales to be seasonally lower in Q1 and based on January to date, well-distributed throughout the quarter.

So, our revenue guidance for Q1 is a range of $19m to $20m; gross margins at approximately 38 percent; operating expenses at approximately $71.m and net earnings of $100,000 to $300,000, or 1 cent to 2 cents per share. For cash flow, we expect this to be neutral. With that, I'll now turn it over to David for a summary.

Well, thanks, Peter, and thanks, Jason, as well. Just to summarize, starting with the fourth quarter, our revenues and net earnings were both better than expected. And during 2002, in a very difficult macro and industry environment, we were able to grow our top line by over 20 percent year-over-year and we also were able to return the company to profitability during the second half of the year. We're now generating positive cash flow from operations, and our restructuring, combined with sales of our newer 2.5G products, especially the AirCard line, have been significant contributors to these operating improvements.

As we've indicated for the last couple of quarters, we're focused on profitable growth as the basis for operating a business. Our priorities as a management team remain -- expansive of our distribution channels, sell-through to end customers, and continued investment for future growth.

I'd like to thank you all for taking the time to be on the call today, and if there's any questions, we'd be delighted to take them now. Operator, if you could queue up the questions, please.

We will now begin the question and answer session. To place yourself in to the question queue, please press *, 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset and then press *, 1. To withdraw your request, please press *, 2. Please go ahead if you have any questions.

Your first question comes from Gary Baker. Please go ahead.

Hi, guys. Can you give us a little bit of color on top customers in the quarter?

Sure. In terms of customer concentration, we had three of our customers that each represented over 10 percent of our business for the quarter, and those three customers totaled approximately 53 percent of our business for the quarter. And it's safe to say that the majority of the larger customers are in our North American business. But I'll comment further, that at least one of our customers in the top ten was from outside of North America.

Okay. And then along the same lines, can you update us on the state of your existing contracts with like, Verizon, Sprint. I guess Verizon was $30m over 12 months -- I think you started shipping first quarter of last year. And Sprint, I think, was $24m over a multi-year. Can you tell us how that's going to unfold as those contracts expire, or has there been a change in that contractual relationship that's developed over the last while?

Well, I'll comment on a few of those. First off, there's been no changes in those contractual relationships. Starting with one big customer you didn't mention, Toshiba, we have completed shipments on our initial order from Toshiba of $11m and completed shipments on a subsequent add-on order from Toshiba for our SB 555 products. Those products were embedded into the Toshiba [Feira] [phonetic], as you may recall.

So that unfolded exactly as we planned. As it relates to some of our major carrier agreements, Sprint, as a I mentioned earlier, we commenced volume shipments to Sprint of the AirCard 550. That's satisfying a portion of our overall supply agreement with Sprint. As you may recall, our supply agreement with Sprint was spread over multi years, and also multi-product platforms. The first platform we shipped was a CDMA IS 95A AirCard, and we completed shipments of that device last year. And in October we commenced shipments of the AirCard 550, satisfying the second portion of that agreement. So those shipments have commenced, and we expect them to unfold in line with our contractual relationship.

With Verizon Wireless, we have an agreement to ship AirCard 555 product over approximately 12 months. We commenced shipments on that product a bit later than we had originally planned; I believe we commenced shipments in January, and those shipments continue to unfold, and will probably stretch beyond the original 12-month shipment schedule. But I think it's safe to say that both Verizon and us are pleased so far with how the shipments are rolling out and with the early indications of customer sell-through.

So to follow-up, to take the Verizon one - I mean, when you've satisfied the contractual agreement, can we expect that going forward, after the contract expires, it will just be – they'll order based on what they see and what their sell-through is, as opposed to another announcement saying we've got a 12-month agreement for X millions of dollars?

I think it's hard to say. That's probably a question better asked to Verizon. But I certainly don't expect, nor do we encourage, our distribution partners to buy well ahead of real customer volume. And we're very tuned in to what end customer demand is, and candidly, our goal is to support our partners in meeting, not overly exceeding, customer demand.

And I might add, there's a bit of a hidden risk, too, in large add-on orders, and that risk is to ASP. So I think, in terms of an overall healthy relationship and maintenance of ASP and margins, we're perfectly pleased if our carrier and distribution partners order to meet, rather than exceed, customer demand.

Just one last quick one, then, on the same topic. Would it be fair to say that based on the sales-through you're seeing, that based on the sales-through you're seeing that that Verizon contract, in terms of size, is sort of a good indication with the sales-through would be with that product, going forward?

I think generally speaking, yes. If you take that, if you take the overall volume commitment and stretch it a bit greater than 12 months, it's probably a pretty good indication of what the early indications of end user demand are.

I might also add another agreement that you didn't mention that I will, is our revised agreement with AT&T Wireless, and we have commenced shipments now of both the AirCard 710 and AirCard 750 under that agreement, and those shipments, too, are unfolding per our revised contractual commitment with AT&T.

Okay, thanks very much.

You're welcome.

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

Just on your last comment, Jason, if the demand of $30m over, say, 12 to 15 months is representative of what you're seeing initially, is there anything that we should expect from a carrier partner like AT&T Wireless, who's taking $6.5m over, I believe, six quarters? Or is there a disconnect in terms of how well these channel partners are working for you?

You know, as you go from carrier to carrier, there's always differences in terms of networks, sales quality, sales focus as well. So it's difficult for me to comment on that. So I wouldn't generalize with what you see from Verizon and immediately attribute that kind of sell-through to every carrier. I mean, carrier capability, carrier networks, vary.

Okay, and if I understand the Sprint situation, you commenced, but you did not complete that $24m deal yet? It's still ongoing for this quarter?

Correct.

Okay. What happened in the European and Asian markets? It looked like Europe declined 50 percent sequentially, Asia had a nice little pick-up. Are you guys seeing any trends there? Were there reasons for such a slowdown sequentially in Europe?

Yes – actually, Europe didn't drop quite 50 percent. The numbers that we presented were somewhat shielded by the fact that we actually funneled a fair amount of North American OEM-based revenue into European customers. So while there was a slight dip in European revenue, our bookings in Europe were actually significantly higher. So all leading indicators for us in Europe, from a standing start in March, are positive. And the same goes for Asia Pac. As you indicated, we had a nice bump-up in Q4 in Asia Pacific activity, and I'm expecting that that trend will continue in Asia Pacific.

Can you comment on what the book-to-bill looked like in the quarter?

Yes, I'll comment – I'll make a regional comment on that. In North America, as you might expect, the book-to-bill ratio was less than 1, given that we're working off quite a bit of backlog from our major supply agreements with North American carriers. Our book-to-bill ratio in both Asia Pac and AMEA was substantially greater than one.

And North America less than 1, is there a range – was it over .5 or was it substantially less than 1?

It was greater than .5, but that's as far as I'll comment.

Okay. Last question. The pricing on the OEM wins – you guys have one so far – lots of new products being announced from some of your private competitors and some of the chipset guys. What are you seeing there in terms of inability, let's say, to get into these deals? Or [indiscernible] not to enter these deals?

I'd say competition, particularly in the GPRS space, has increased, and the complexion of that competition has changed, as you indicated. You still have smaller and financially less viable competitors in that space, as we always have, but we also have new, stronger – at least financially stronger – entrants like Sony-Ericcson and Nokia. And so far, they're competing as we would expect. They already have good, strong existing channels for distribution, but their focus and capability in the wireless data effort, and experience in the wireless data space, you know, isn't quite where ours is. So they certainly bring to the table a greater brand recognition and existing channel for distributions. I think what we bring to the table is, generally speaking, products that are better attuned for the wireless data space, and a business model, sales and support capability that's better attuned to the wireless data space.

Just sort of one follow-on. If you take a company like WaveCom with an ASP, probably closer to 50 bucks than 100 bucks -- granted they're more for handsets -- is it possible for Sierra to compete against competitors like that, when I'm assuming your ASP for an OEM is closer to two hundred dollars?

I think -- I mean, the answer is yes, we compete very effectively where we choose to compete. And in cases where ASP and margins don't fit our business model, very often we choose not to compete.

Great. Thank you.

You're welcome.

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

Hey, guys. Good quarter. First question is – I apologize, Peter, if you've addressed this -- but what's the long-term debt and current portion of long-term debt that showed up on the balance sheet this quarter?

That is the warrants due to Technology Partnership Canada as part of our R&D funding. Part of that transaction is they get warrants to the amount of $2m worth that are due by the end of 2003, so they become current. They were previously in long-term debt.

Got it. And can you tell us how that's going to play out? Or do you want to just point us to disclosure in a filing?

No, Ray, that really is up to Technology Partnership Canada.

Okay. The existing agreements that you have for R&D partnerships with companies like Lucent, how do you account for that with the change in the accounting that you mentioned in the quarter? Are there any material subsidies, programs that you're still going on with partners like that? And how are they being accounted for?

To go with the first way you put your question, what's the accounting treatment? In terms of this reclassification we have, in the sense of the presentation, the criteria to recognize these funding credits is exactly the same. You've got to have delivered whatever it is that's required as part of the agreement; it's got to be accepted by, say, Lucent or whomever, and at that point in time, it can be recognized. What is happening is simply a restatement out of the R&D line into the revenue line. In terms of ongoing --

So, Ray, do you understand that?

Yes, I got that part.

To the second part of your question, Ray, of major development R&D contracts that are under way, that have got funding, the major one that's left is the Technology Partnership Canada. Lucent, as Jason mentioned earlier – we have delivered product to them and that fundamentally is at an end.

Okay. Just a last question for David, if I could. David, I'm sure this will be fleshed out more in the coming days, but what's your sense as to how the market is now versus in the past? Do you sense a turn in end user demand? Any broad strokes you can provide to us? Thanks.

Okay. Well, I think that – and when you're doing a quarterly call that comes at the end of a year, you can probably take a little bit of a longer perspective than a quarter. When I look back on 2002, one of the trends – a couple trends – that we've seen -- we've launched a number of new products into existing channels and we've broadened our overall channels and put the new products there as well.

While that happened, we've seen our channel inventory, in unit terms, go up, over the course of the year, but we've also seen sell-through, or end customer demand, increase as well over the course of the year. And that increase in sell-through has been a strong enough trend that channel inventory, although it's up on a unit basis, is down on a weeks-of-inventory-in-the-channel basis.

So pretty encouraging trend over the course of 2002, and of course, I don't want to try and predict how will all that trend in the future, but that's an observation on both the channels and on the sell-through to end customers that we've seen, in the trends we've been seeing over the last four quarters.

Great. Thanks very much, guys.

Your next question comes from Chris Umiatowski. Please go ahead.

Hi, guys. First question is, on the operating expense line, can you give us a little bit more detail on exactly what's going on there? $7m this quarter – are you looking for it to climb to $7.1m? After your restructuring, you had talked about it going to $6m. Obviously, the revenues have been stronger than we'd expected, so I think we'd expect the op ex to be a little higher than $6m. But still increasing in a quarter where you're going to see slightly down revenues, can you just comment on what's going on behind the scenes?

Yes. If you recall, Chris, we'd also said that part of our restructuring is to have sufficient funding for any reinvestment opportunities to come along, and we continue to reinvest in our existing product line and technology line other than in CDPD. Another factor that's affecting operating expenses is the impact of insurance. I referred to that earlier. Insurance premiums have increased significantly, as I'm sure you're aware, in terms of directors' and officers' insurance and also property insurance. So we've been caught in that. Our renewal date is October 1st of the year. So that affects us going forward.

They're the main items that are affecting op ex going forward.

Okay, thanks. And then, I guess, Jason -- with respect to Europe versus North America, most of your sales are coming from North America right now; in Europe, there's obviously a lot of sophisticated networks as well on the 2.5G wireless side. Given the number of channels you have access to, should we expect to see similar patterns emerge in Europe where that becomes a pretty significant portion of sales?

Yes.

Any particular networks you want to comment on there at all?

Other than what I've already mentioned on this call, and what we've mentioned on previous calls with the likes of [Bodafone U.K.] [phonetic] and [Telefonica] [phonetic], I think that paints a pretty strong picture of expansion, certainly in Western Europe. And we continue to develop the business with the channels we've already put in place with Western Europe, and establish new ones.

Okay, and last question again for you, Jason. The top three customers, I think you said, were 54 percent of revenues. Can you break those out individually, in terms of percentages for each one?

No, I can't do that.

Okay, thanks.

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

Good quarter guys. I was wondering, maybe, if you could just start off and talk a little bit about the OEM pipeline. And, you know, it’s been a while since we saw a CMA 1X OEM agreement there like a Toshiba. What’s the prospect for new opportunities in this space right now?

Well, you know, the OEM business, as you know, Deepak, has always been a little bit lumpy. It comes in big chunks and Toshiba happened to be one of those big chumps. Underlying the lumps, we always have had a very steady base of our core OEM customers, you know, people like Panasonic and Itronix and the like.

And that base continues to be pretty strong and we’ve made some good design-win progress in that space. And we continue to work on a funnel of select big deals as well. So, it’s kind of business as usual, frankly, in the OEM space for us. You know, good core business with our typical OEM partners and a funnel of big opportunities.

How much of the OEM business this quarter would represent [indiscernible] people, about 50%?

Yes, it would be.

Going forward, like, the drop in revenues sequentially, most of it would be related, then to the OEM side of the business?

Actually if you look at our comments on Q1 guidance, we -- a general comment is, generally, Q1 is seasonally softer than Q4. You can’t see that last year because we introduced a bunch of new products in the first quarter, which increased revenue. But, generally, we have a seasonally flatter, soft Q1. The second most important factor in Q1 is we are expecting CDPD revenue to be very modest going forward and for Q1, incorporated in our expectations is CDPD revenue at less than 10%.

I can imply that it was greater than 10% this last quarter?

That’s a reasonable inference, but I don’t have the number right in front of me to be able to confirm that. And so, to your point about OEM, we have OEM products, or OEM sales, in CDPD embedded modules and they are declining.

And we have OEM revenue in CDMA embedded modules and they’re – got a steady base, but they also have lumpiness quarter to quarter depending on timing to major customers. And so that could well be lighter in Q1, but it’s not the primary factors causing us to set the guidance where we have.

Finally, we do have some GPRS OEM revenue, as Jason said. Although we don’t like to operate at the very thin margin and $50 or $100 price point of some of the OEM modules business in competitors, we do enjoy some opportunities in the GPR space for OEM and have previously announced those and are shipping the products and earning revenues in that area, as well.

Maybe, David, you can also speak to – can you give us maybe a sense of how many – 2-1/2 GPC card users are out there? Are we talking about, like, under 10,000, 50,0000, 100,000 – just to get a better sense of how many people are actually using the cards on the various networks, maybe within North America right now? Or any sense that you have that you can pass on color to us?

Well, that sounds like a reasonable question, but it immediately becomes us describing the numbers of subscribers on our network partners networks, which isn’t something that they would encourage us to do. You can certainly see what our sales rates are. We’ve indicated, we give a break down and we have, again this quarter, a breakdown on percentage on our total revenues that are coming from PC cards.

Those are substantially all 2.5 GPC cards now. CDPD PC card sales have declined to negligible levels so you could take a percentage of PC card – of our revenues that are PC cards, attribute almost all of it to 2.5 G and I think the math is pretty easy from there. And then the only remaining thing you’ve got to look at is, of course, our revenues are sales to our channels and you have to calculate the sell-through affect. We just can’t provide that data, regionally or by carrier.

Yes, just to get a better sense of how many users are actually using the products out there right now.

Well, certainly by any reasonable math, it’s not – I think one of the numbers you mentioned was 10,000. It can’t be a number that small. So any reasonable math will give you a pretty good estimation.

Okay, fair enough. Peter, just one last quick question. In the operating expenses, the 7.1 million, does that include the amortization line?

Yes it does.

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

No, it’s John Bucher at Gerard Klauer. Question for you all. If you had to look at what the one or two most critical factors are for your revenue ramp, Q1 through Q4 of ’03, to be somewhat similar to what it was in ’02, what would those factors be?

David, I’ll take that because I’ve got comments that are on that in my summary comments that, clearly, is driven by the business [clarity’s] we outlined. The first being, continued – or further expansion of our distribution channels into geographic and channel factors that we haven’t yet penetrated with the new products.

The second is sell -through by those – continued and increased in sell-through by those channels to end customers, triggering a follow on demand to us. And, the third is us continuing, despite the overall macro environment being difficult, us continuing to invest our R&D dollars in programs that afford us the opportunities for additional future growth

So those are our three priorities that really speak to what we think we need to do to see good operating results through 2003, and in fact, into 2004.

Then, regarding EV DO, you mentioned the successful demonstrations that you’ve done with Lucent. With Verizon and Sprint PCS, apparently, not going to do D.O. in the future, there still are some D.O networks here in the U.S. and, of course, in Asia Pacific. I’m just wondering what you see as the market opportunity for D.O.? You, obviously, made progress on the product relevant side.

As it relates to EV DO, we have, already, as we demonstrated, made product investments in that space and gotten products to the point where they’re form factor compliant within a PC card container and, of course, functionally compliant with the EV DO spec.

As it relates to further investment and truly commercializing those products and investing a great deal in new customer acquisition, we are cautious. We are watching where EV DO’s being deployed. We’re watching for – where it’s already deployed. We’re having conversations with carriers in those areas. And for operators for contemplating deployment, we’re speaking with them, as well. I think the key for us is to time our investments so that they align with real mass deployment of EV DOs, so our investment isn’t well ahead of market availability.

Thank you very much.

Our next question comes from Howard Lis. Please go ahead.

Thank you. Good evening. Just a couple of clarification points. First, just on the difference between the revenue for the year-and the adjusted revenue, was that delta, again all tied to this new presentation of some of the R&D grants?

Yes, it was.

Okay. And, therefore, in your Q1 guidance, how much R&D grant revenue is that guidance number?

Zero

Okay, well, is it going to be zero going forward?

No. We don’t – somebody asked me the question of timing. We’ve got some projects still underway. The question is when will have fulfilled the delivery that enables us to recognize the revenue.

Okay, and just trying to figure out the actual line items in expenses here. Was the admin expense a million dollars? If I go through your numbers here, is that right?

Admin expense for Q4? It actually shows a recovery and that comes from the settlement of the Metricom claims to our favor with the one-time adjustment of 1.8 million. So you need to back out the credit and you’ll get, approximately, 1.35 million in G&A expense for the quarter.

Okay, that’s why I’m asking the question. Because I’ve done the back out and I get a million dollars and I just wanted to check if that was right. Because you’re R&D number is shown clean, like without the credit. So, is it 1.3, Peter, or is it 1?

Just go to 1.3.

Okay. Thanks. And the comment you made on CDPD being less than 10% of sales in ’03, can you give us – just to put that in context, you know, where was that in Q4? And where was it for the year, ’02?

Howard, we haven’t, historically, been in the habit of reporting sales breakdown by technology, and so we haven’t prepared a historical segment in breakdown by technology that would allow us to answer that question and do it in a way that’s proper disclosure. What we did think would be useful, in terms of looking forward, for people to understand the portion of our inventory, our net inventory, which relates to CDPD, and we commented on that.

And, also, the portion of our Q1 expectations, which relate to CDPD and we commented on that. But, unfortunately, we’re not in a position to answer the historical mix questions.

Okay, and just on that point about the inventory breakdown and you’re still selling CDPD, it’s not a technology that’s evolving all that much, why did you feel you had to write-down inventory, if you anticipate over the year that you’ll get whatever it is, the 5 or 8 million in sales?

Well, part of that is the fact that CDPD sales – what we expect to sell in CDPD during 2003 doesn’t perfectly line up with what we have in inventory in CDPD precuts. We have multiple products there. Some are not selling and we have inventory and others are selling and we have inventory or we need to do new production to meet the demand. So, it’s not homogenous. It’s by product line. You have to look at that.

And, then, secondly, what’s caused us to increase the reserve was simply that from the time we put our restructuring plan together in June to the end of December, we saw an even more rapid decline in CDPD future demand forecast than we had anticipated. And that’s why we took that additional adjustment.

Okay, and then a, I don’t know, sort of a two-part question. What was the head count at year-end? And if you could just provide any more color on sell-through in the channels? You mentioned you’re pretty in tune with the customer demand that your carrier partners are getting. Maybe you could just give us a better sense of who’s – what’s the type of customer buying these products? What’s the normal pattern? Do they try a handful of these products and then roll them out? If you could help us out with that, thanks.

Okay, head count at year-end was 181, which is about 3 or 4 people under the head count we targeted in the restructuring program. And I’ll turn the customer profile, the end customer profile number question over to Jason.

Just in terms of the customer adoption, as well – just, I think that was part of your question. Commenting on that and just re-iterating what David already said, over the course of 2002, we certainly experienced an increase in end customer demand when measured from the beginning of the year to the end of the year, as you would expect, as we expanded our channels, and as we released product that operates faster and on better networks.

So end customer adoption, clearly, increased. And in terms of the profile of the end customer adopting the products, our efforts are very much corporate enterprise focused and within the corporate enterprise, we generally find a blend of blue-collar corporate enterprise workers, like police officers and field service workers, and white-collar corporate enterprise workers, like sales people and corporate executives.

And, I think, just giving some color to that comment, it’s safe to say that that blend, the blue-collar versus white-collar blend, has shifted also, significantly, for us over the course of 2002, to be a bit more heavily weighted to the white-collar corporate enterprise.

Your next question comes from Michael Urlocker. Please go ahead.

Good evening. I had a few questions. First, congratulations on getting some money back relating to Metricom. Can you help us – as these things are hard to do – I think the amount’s 1.8 million, can you let me understand -- the charges you took were, I believe, 13 million. Was that your assessment of how much money was actually owed?

Just to clarify that Michael. I don’t believe we took a $13 million charge. We made a $13 million –

Oh, no no, I mean historically.

Even historically, our charges related to Metricom were inventory write-downs and allowance for doubtful accounts on the accounts receivable and those charges were taken in the second quarter of 2001. So, about six or seven quarters ago. They – I’ve forgotten the exact amount they totaled, but I believe they totaled considerably less than the 13 million.

Now that said, we made a claim against Metriom for the amounts we had to take charges on and, in addition, to the other costs or impacts to us, that [contraveined] our contract with Metricom. And those things, all taken in aggregate, were somewhere between 10 and $15 million. It may well have been about 13. And we then entered a particular creditor pool in the Metricom settlement and had to abdicate our claim and settle for a percent – so many cents on the dollar of our successful claim. And the $1.8 million

Okay, secondly, on [dithera], I want to make sure I heard correctly, it was said [dethera] represented a percentage of bookings? Did I hear 50%?

No, you misheard that.

Well, did you want to offer a percentage?

Well, no I didn’t. What I did say was that our shipments to Toshiba included concluding the original purchase commitment of $11 million plus an add-on order.

Okay. Can you offer, perhaps, just a qualitative observation – frankly, where I sit, I don’t see too much action on [dithera]. What’s your perception of the acceptance and the lifespan of that product for you, insofar as it has an impact on your business?

Well, that’s a Toshiba flagship product for their entry into the PVA and the wireless PVA market. They have it launched through Audiovox with Verizon and Sprint and Bell Mobility, and we’ve heard varied reports from different carriers, and in fact from different sales regions within the carriers, on how attractive the product is to their particular target customers and how well it’s selling through.

So, it’s not a uniform picture that we’re getting back and we have to see how that is going to evolve. I’m hesitant to under-estimate the market strength of a company like Toshiba who’s already one of the top market share companies in the corporate enterprise market with notebooks and wants to be one of the top market share companies in that same market segment with PDAs.

Okay, and in terms of the outlook, you describe or [indiscernible] that would see gross margins improve, I think, by 2 points, though there is a bit of seasonality weakness on the revenue. Can you help us understand what’s the dynamic that you see in actions they’re taking, or other factors that would cause the gross margins to improve?

Well, the two things that cause us to forecast, or guide, a good gross margin increase in Q1 are our forecast of product mix for the quarter, and that is, our current expectations are the product mix will be fairly favorable. We balanced toward higher gross margin products in Q1.

And the second factor, as we’ve said in past calls, we’ve been diligently grinding away on the un-glorious job product cost reduction and we’re starting to get good visibility on some significant reductions in product costs on some of our products. And those two factors, taken together, cause us to indicate in our guidance, higher gross margins.

Okay, and another small financial observation, your short-term debt was up in the quarter. Can you offer any rationale for that?

Yes, that question was asked earlier, Mike, you might not have been here for that. That relates to the warrants that are due to technology partnership Canada as part of the R&D agreement we have with them. Those warrants are due by the end of this year, so therefore the [indiscernible] to be current out of long-term.

Okay, and finally, David, if maybe you could offer an observation of what you’re seeing in acceptance of wireless data products from carriers and the end markets?

Well, I think I’ll probably repeat what I said earlier, and what Jason said as well. Over the course of 2002, we launched new products while the carriers launched new networks and that was true, both of our existing channel relationships, as well as our pretty significant progress over the course of the year on adding new channels. So with that as a backdrop, we saw end customers – we saw our channel demand and end customer demand increase over the course of the year on a trend basis. And we found that fairly encouraging and that’s been helpful to the improvements in our operating performance.

We’ve given Q1 guidance, so one quarter, as we’ve been in the habit of doing for other quarters, now we’ve given guidance for one quarter ahead, trying to look beyond the quarter and make a more general comment, our focus is, entirely, as a management team, running the business on the principal of profitable growth. And the three things we’re focusing on to drive profitable growth are further expansions to our channels, a significant focus on end customer sell-through with our channels and a continued focus, despite the difficult overall conditions, on putting investment dollars back into programs that offer us the opportunity to have growth beyond what we’re currently showing.

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

Thank you. Most of my questions have been answered. I just had a quick clarification. Jason, did you say that Verizon just started shipping against that contract in January? There’s no revenue in Q4?

No, I did say we started shipping against that agreement in January of ’02 and there was indeed revenue associated with that in Q4.

Got it. That’s all I needed. Thank you.

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

Thank you. Jason, just a question on the product mix going into Q1 with the Toshiba contract, basically, being satisfied, plus the additional shipment, should we expect to – do you expect to see a shift, even more so, toward the AirCard shipments in Q1?

I do expect to see that – and David commented earlier on product mix and it’s impact on our rise in gross margin, and that’s partly what is driving it, as you probably know. Margins on our OEM products are a bit lower than the margins we get on our AirCard products. So, we are expecting a higher mix of AirCard in Q1. And then looking beyond to Q2 and Q3, it’s hard to tell, at this point in time.

And with regard to channel sell-through and your revenue guidance for Q1 total, David, is part of the reason for the low revenue guidance because you expect some inventory drawn down in the channels based on the inventory build-up in Q4 and Q3?

Sinfully, no. Although, if you look at the pattern in the industry, there’s more than one factor at play. One of the reasons Q4 is strong in our industry, traditionally, is the wireless carriers add a significant percentage of their net subscriber adds in the period from, roughly, Labor Day to a couple weeks before Christmas. So that’s – in anticipation of that, the carriers, which are just one of our channels, but, the carrier channels tend to buy significant inventory in preparation for that busy period.

And, to the extent that corporate enterprises spend more money during that period, particularly with finishing up budget before December year-ends, that can be a phenemonon. There’s also evidence of higher end-customer demand during that period.

We tend to come out of a Q4 with a pretty balanced channel inventory and Q1, corporate buyers tend to get off to a slow start so that affects end customer demand, and channels are doing inventory counts and figuring out where they’re at on channel inventory and updating their demand forecasts, and so that can be slow as well.

Now, notwithstanding that we’ve guided Q1 as having some seasonal softness, we are seeing a good solid start to the quarter in the approximately one month of operating results that we can already see, internally, basically January, month-to-date. So I think we’re going to see a quarter that’s seasonally a little softer, light on CVP revenue and that, basically, is pretty evenly distributed through the quarter. We’re not expecting to be back-end loaded in the quarter in terms of revenue or shipments.

Okay, I still have a couple more quick questions. In the North American market, where we have several different networks available, do you see, or do you have any kind of feeling for if end customers have a choice between a CDMA or a GPRS network if there’s a – tends to be a preference on which network they choose in those markets where they have a choice?

Oh, you know, that’s a – I’m certain that I have partners on both sides of that question, business partners on both sides of that question who have a keen interest in our quarterly results conference calls. And not now, or at any other point, do I really want to steer a customer, or a shareholder for that matter, in the direction of one of the technologies or the other. We’re playing in both [CDNA] and GPRS, specifically because there are major carriers and business partners who have a vested interest in each of those. And, frankly, the end customer’s decision is often driven by factors that are not directly based on the underlying wireless technology. Everything from quality to service, coverage, pricing plans from the carrier, existing corporate relationships and numerous other factors, of which, the underlying wireless technology is just one.

So, I mean, I’m politically ducking the question because we have partners on both sides and we’re not, you know, religiously wedded to one camp or the other. I’m also pointing out to you that it’s not actually as important a question, at least in understanding our business, as you might think it is, specifically, because we bat on both sides.

Yes, I certainly understand that there’s lots of other factors besides just the network. I was just wondering if you foresee a preference. But I also understand why you don’t want to answer the question. That’s fine.

Great. I appreciate that one.

One last question. When you launched with T-Mobile U.S., one of the comments was about future global roaming on the T-Mobile network. I’m just wondering if you can give us any information about whether that global roaming is up in place and whether you see that driving even more AirCard 750 revenue in the future?

Well, as you may recall, when we made the announce with T-Mobile U.S.A., part of the announcement was, indeed, mobile roaming capability, and in fact, it was even demonstrating – roaming, trans-Atlantically, was demonstrated as part of that. So, how many roaming agreements – Trans-Atlantic roaming agreements are in place? Certainly some. I mean, they’ve been in place for some time and, in fact, we use them routinely when we go across the Atlantic to do our business in Europe. And I’m sure there are a number of T-Mobile customers who do exactly the same thing. How much incremental demand that global roaming capability is going to derive is really tough to say. But, clearly, there are companies that operate, internationally, that will view that capability as advantageous.

Okay. Thank you very much.

Okay, to the people on the call, we’re starting to run fairly long here and perhaps we’ll take one more question and if we commit the sin of cutting anyone off, please feel free to contact the company by calling Peter Roberts, and the contact information is at the bottom of our news release. So, operator we’d like to take one last question.

Once again, to place yourself into the question queue, please press star 1 on your touchtone phone.

Sir, there aren’t any questions at this time.

All right. It sounds like we had an uncanny sense of timing. Thank you all very much, and thanks operator.

This concludes today’s conference call. Please disconnect your lines and thank you for your participation.