司亞樂 (SWIR) 2003 Q1 法說會逐字稿

Thank you for holding for the Sierra Wireless first quarter results conference call. I'd like to introduce your speakers, Mr. Peter Roberts and Mr. David Sutcliffe.

Thank you, operator. It's David Sutcliffe. I'm the chair and CEO of Sierra Wireless. With me is Peter Roberts, the Chief Financial Officer and Jason Cohenour, Senior Vice President of worldwide sales and marketing.

Today we'll -- we'll cover forward-looking statements, disclaimer. Peter will report on our Q1 financial performance, Jason will provide an update on the business developments during the quarter and Peter will then cover guidance for the second quarter and a trends outlook for the second half. I'll conclude by summarizing and then we'll go to questions as usual.

With that, I'll turn it over to Peter.

Thanks, David. Good afternoon, everyone.

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 are linked to, among other things, statements about future market conditions, supply conditions, channel and end customer demand conditions, revenues, gross margins, operating expenses, profits and other expectations, intentions and plans that are not historical fact. Our expectations regarding future revenues depend in part on our ability to develop, manufacture and supply products, which we do not produce today and which we define specifications. In light of the many risks and uncertainties surrounding the wireless communications data market, we cannot assure you that the forward-looking statements discussed will be realized.

To our financial results, to remind everyone, our results are reported in U.S. dollars and in accordance with U.S. GAAP. First quarter revenue was $20.1 million, better than our guidance of 19 to $20 million. Net earnings of .$4 million were better than guidance of .1 to .3 million. We were cash flow positive by &2.7 million for the quarter, better than our guidance of neutral. Adjustments were made in Q4 of 2002.

Our discussion which follows where described as suggested excludes the fourth quarter 2002 effects of the net restructuring and other charges of $1.6 million and our Metricom recovery of $1.8 million. In Q1 of 2003 there, were no such adjustments.

A comparable quarter financial performance, Q1 of 2003 compared to Q1 of 2002. Revenue increased to $20.1 million from $16.7 million, an increase of 21%.

Gross margin percentage improved to 39.5% from a logistic gross margin of 35.5%. Q1 2003 operating expenses were $7.6 million compared to $10.2 million in Q1 of 2002. Net earnings were .4 million compared to a net loss of $4.3 million in Q1 of 2002. Diluted earnings per share were 2 cents compared to adjusted diluted loss per share of 27 cents last year.

The sequential quarter, Q1 2003 compared to Q4 2002, revenue decreased to $20.1 million from 22.5 million, a decrease of 11%. Gross margin percentage improved to 39.5% from adjusted gross margin of 37.1%. Q1 2003 operating expenses were $7.6 million compared to adjusted operating expenses of $7.3 million in Q4, 2002.

Net earnings were .4 million compared to adjusted net earnings of 1.1 million in Q4. Diluted earnings per share were at 2 cents compared to adjusted earnings of 6 cents in Q4.

Commentary on the sequential quarter. The revenue decreased as a result of expected lower seasonal demand and lower OEM sales. There was a significant shift in geographic mix of revenue from the Americas to the Asia Pacific region and to Europe, reflecting strong international demand and weaker U.S. demand.

Our gross margin percentage improved despite difficult economic conditions. Improvement in gross margin resulted from a greater mix of 2.5G AirCard sales and a reduction in product costs. Our operating expenses increased due to higher than normal legal expenses, the effects of foreign exchange and our continuing investment for future growth.

Turning to our segmented performance, revenues by product segment. MP, Q1 of '03 were 7% compared to Q4 '02 of 6% and 10% for fiscal 2002. AirCards were 80% in Q1 '03, 71% in Q4 '02 and 58% for fiscal 2002. OEM was 11% in Q1, 19% in Q4 and 25% for the year '02. Other was 2% in Q1, 4% in Q4 and 7% in '02. Our AirCard sales were exceptionally strong in this quarter.

Revenues by distribution channel, carriers in Q1 '03 were 48%, 53% in Q4 '02 and 43% in fiscal '02. Value-added resellers were 36% in Q1, 23% in Q4 and 25% for 2002. OEMs were 15% in Q1, 22% in Q4 and 25% in 2002. Direct and other were 1% in Q1, 2% in Q4 and 7% in 2002. The three major indirect channels continue to be strong. We should expect product in channel percentages to fluctuate quarter-to-quarter based on mix.

And now, in response to popular demand, we are now introducing new revenue segmentation by technology line. So GPRS and GSM in Q1 of '03 was 43%, in Q4 of '02, was 36%, and for fiscal 2002 was 24%. CDMA was 45% in Q1 of '03, 52% of Q4 of '02 and 54% of fiscal 2002. CDPD was 12% in Q1 '03, 12% in Q4 '02 and 22% in 2002. We should expect these percentages to continue to fluctuate.

And again, initial disclosure relating to our continuing investment in R&D. Revenue from new products introduced in the last 18 months. Q1 of '03, this represented 87%. In Q4 '02, it represented 86%. And for 2002 it represented 77%.

And finally, our geographic is segmentation, the Americas in Q1 '03 were 61%, 86% in Q4 of '02 and 87% in 2002. Europe and Amir were 16% in Q1 '03, 35% in Q4 '02 and 7% in 2002. Asia Pacific was 23% in Q1 of '03, 9% in Q4 of '02 and 6% in 2002. So, clearly our Europe and Asia Pacific business is growing rapidly and we expect this segment to continue to fluctuate.

Turning to our balance sheet and comparing it to December 31 of 2002, cash and short-term investments increased by $2.7 million to $37.5 million from $34.8 million. This increase is due to cash generated from operating earnings, working capital flows and the receipt of the Metricom settlement. Trade accounts receivable DSO decreased to 35 days from 40 days in December, and this is well below our new target of 60 days. Net inventory increased to $7.5 million from $6.7 million. CDPD inventory is less than one quarter of this amount.

Now to turn it to Jason for business development.

Thank you, Peter. I'm going to begin by highlighting some of the market developments in our CDMA line of products.

First, as a result of achieving Microsoft WICKLE certification, the Sierra Wireless AirCard 555, which is our dual-band 1XPC card, received Microsoft Corps. Designed for Windows XP decal. It allows us to have a nice sticker on the box. Products designed for Windows XP ensures customers of a smooth installation and trouble-free operation with the AirCard 555, when being used in notebooks running windows XP. This is development is an example of our ongoing efforts to improve the user experience and increase the user adoption of our products.

Secondly, one of our channel partners, Internet service provider Earthlink, launched a new service called Earthlink Wireless Enhanced Access for your Laptop. The new Earthlink service uses a Sierra Wireless AirCard 555 and CDMA 1X service, enabling mobile professionals to wirelessly connect to the Earthlink Internet service at speeds exceeding traditional dialup. Mobile net in Venezuela and Verizon wireless in Puerto Rico. Also, together with Hutchinson Wireless of Thailand, we announced the commercial availability of the AirCard 555 in the Thai market, again demonstrating our commitment expanding distribution in the Asia Pacific region.

Over the course of the quarter and at key trade shows, we showcased several successful end customer deployments of our AirCard products. One example of this was outlined in our announcement with Verizon Wireless that the AirCard 555 was used to wirelessly enable more than 2,000 D-bold field service technicians. D-bold, a global leader in financial self-service ATMs, uses the AirCard to drive improved productivity and customer responsiveness in their field service operation.

Switching now to market developments with our GPRS products, first, we announced the Sierra Wireless AirCard 750, our triband GPRS PC card, is now certified to operate on the orange U.K. network. The AirCard 750 has been tested and approved by 35 GPS network operators around the world.

Secondly, Writer Systems, Europe's leading billing management system provider launched Opera, a new service that widens access to billing information for mobile telecom customers. Opera has been tested with the AirCard 750 as part of a complete wireless data solution. The full solution was showcased by Writer at the Congress in Cannes, France, utilizing a laptop computer and the AirCard 750 operating over the Votophone GPRS network.

Also during the quarter, we announced with AT&T wireless the commercial availability of the AirCard 750. As you may recall, we had previously announced the commercial availability of our AirCard 710 on the AWS network. The AirCard 710 is our single-band GPRS PC card. So, AT&T has now launched both our triband card and our single band GPRS card.

We also previewed and introduced the new Sierra Wireless MP 750 rugged wireless modem, which will operate on GSM and GPRS networks in Europe, Asia and North America. The MP 750 follows in the tradition of our successful MP 700 product for CDDP and will be commercially launched in Q2 of this year. The MP 750 is our first next-generation rugged mobile product and will provide a compelling migration path for our public safety and utility customers who currently use the MP 200.

I'm going to shift now to an update on significant contracts. We have, as you know, significant supply agreements with AT&T Wireless, Sprint PCS and Verizon Wireless. These three agreements were signed over the last two to three years. These delivery schedules associated with the agreements have either been renegotiated as in the case of AWS and we've made public announcements related to that, or relaxed shipment schedules in the case of Sprint PCS and Verizon Wireless. We expect to complete the committed volume shipments under these agreements during the second half of 2003.

Also during this period, we'll be shipping from long lead, large-volume commitments by carriers to fast bookship cycles driven by real end customer demand on multiple channels, not just carrier channels. We view this shift as a healthy return to our roots, which lowers our carrier dependency and has already happened in our business in Europe and Asia Pacific.

I'm going shift it now to Peter to cover guidance.

Thanks, Jason.

Inherent 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 newer products. We expect overall economic and industry sector conditions to continue to be challenging. Our guidance for Q2, 2003 reflects the uncertainty in the U.S. economy.

For revenues, our guidance is a range of 19 to $20 million. Gross margin at approximately 39%. Operating expenses at a range of 7.4 to $7.6 million. And net earnings a range of .1 to .$3 million or 1 penny to 2 pennies per share. And for 2003 Q2 cash flow, we expect it to be neutral.

Looking on a quality basis for the second half 2003 trends and outlook, we expect revenue to reflect underlying end customer demand. Gross margin percentages will improve sequentially as a result of continued product cost reductions. Operating expenses will remain stable. Net earnings will improve as a result of gross margin improvements, and cash flow will be neutral to positive.

Now turning it over to David.

Thanks, Peter, Jason.

And one other development during the last quarter was we appointed a new member to our board of directors. He's Mr. Nadir Mohammed, known to many of you as the President and CEO of Rogers Wireless Communications. With Nadir's knowledge and expertise and proven record of success as a senior executive level in the wireless industry, we think he'll make a significant contribution to furthering our corporate goals and success.

And as we noted at the time of his appointment, we are a Rogers customer and -- and supplier and vice versa on the Rogers side. We reviewed this in advance and concluded that over the last few years our business with Rogers and their business with us represented, in each case, a less than 2% of our respective revenues and expenses, and -- and so we think that that will meet the test of independence. We also expect that that threshold won't be exceeded in the foreseeable future.

Now, turning to a summary on the items we've reviewed in the call today, we had first quarter revenues and net earnings come in in both cases better-than-expected, better than our guidance range. Our gross margin percentage increased despite the difficult economic conditions. We also generated a net profit and positive cash flow for the third consecutive quarter.

We've reported that our newer 2.5G products, especially the AirCards, have been significant contributors to these operating improvements. And our sales in the Asia Pacific region and in Europe grew dramatically this quarter from 14% in the fourth quarter to 39% in the first quarter. And aside from the obvious benefit of that growth, we see this as being very healthy. In another way, it has the additional benefit of reducing customer concentration risk and further diversifying our distribution channels. Just to illustrate that mathematically, in Q4 our three largest customers represented 46% of our revenue. In Q1, our three largest customers represented 36% of our revenue.

Finally, we're focused as we've been reporting for some quarters now, on profitable growth as the basis for operating the business and our priorities remain expansion of our distribution channels, sell-through to end customers and continued investment for future growth.

And that -- that concludes our formal remarks and operator, if you could please queue up the questions.

Thank you. Ladies and gentlemen, we will begin the Q&A session now. If you have a question, press 1 on your touchtone phone. If your question has been answered, press the pound sign. If you're on a speaker phone, pick up the hand set first before entering your request. When I say your name, please ask your question. Thank you. First in the question queue, we have Ray Sharma from BMO Nesbit Burns. Please proceed with your question.

Thanks very much. My first question is -- is just an expansion on one of your comments. Can you guys provide to us the approximate percentage of revenues that were generated in the quarter from the large contracts that AT&T, Sprint and Verizon?

No, Ray, I -- I thought that perhaps after we increased our disclosure and added to additional segmented disclosures that someone wouldn't ask for yet another one, but you're first off and you're asking already. But as you know, we don't report on sales to individual customers and grouping those three companies would, you know, probably would effectively do that. I will say that in the top three customers, in terms of shipments during the quarter, they weren't all drawn from that list of three customers in the U.S.

Okay, the reason I was asking that question is we're going to go through a transition period here as you indicated in the second half, where the sales will be driven more by end user demand than by these contractual agreements. Can you give us any color as to what kind of a mix we should expect in terms of the second half, in terms of the difference between end user demand and contractual relationships?

Yeah, I think I'll let Jason do that.

I think that, Ray, they're already very closely aligned, candidly -- we've, in my comments you heard me say that we are already in the process of shifting to a model that's based and driven by end user demand. We've already, with two of the major agreements, relaxed the shipment schedules from what we it previously agreed to and that candidly is to get them more in line with true end customer demand. So, that -- that shift, while we're announcing it today, frankly has -- has probably been under way for a while. So, I know that's a qualitative statement and won't give you the numerical information you want, but we believe the shift is already under way. I will give you one more qualitative statement on sell-through, we, over the last 12 months on aggregate sell-through, the three large contracts included, has risen dramatically. So, we're quite comfortable with the sell-through trend.

Okay, actually that's very helpful. And you already mentioned Europe and Asia, you're already in that -- in that type of phenomena and I guess just my last quick question is would you characterize the quarter that there was a -- there was a -- can you give us any color on any sort of inventory build in the quarter? Of course in a growing market it's okay to have modest inventory build, but do you have information in n that regard, please?

Yeah it came down. Channel inventory came down.

Okay. Thank you.

Next in the question queue we have Barry Richards from CIBC World Markets. Please proceed with your question.

Yeah, good afternoon, David, you mentioned the focus being profitable growth, I wondered if you had to pick one of the two, which one of the two are you focusing on more? It seems like there's more of a focus on a return to profitability in the back half of last year. You generated 9 cents a share in earnings in those two quarters combined. We're on track for that much, it looks like for the year, so, you ramped R&D and I'm trying to get a sense for 2003, what are the balances more on the growth side than it is on the profitability side?

Well, frankly, Barry, it is a balancing act. The first premise is to be profitable, if I have to put one before the other. And -- and then the second premise is to grow. And just to comment on -- on Q1 we had operating expense up, you know, we did -- we did better on gross margin than the guidance and we also had operating expense up at a higher level than we guided and those things, roughly offset each other. One of the -- one of the three factors in Op Ex was a ramp in some investments we're making for future growth, but the other two factors in Op Ex being up in Q1, Peter touched on, one was legal competences and the other was foreign exchange fluctuation. And those items, although I won't say they're nonrecurring, they're not necessarily recurring every quarter. So, I think you should look to our guidance for Q2, which is flat to moderately down on Op Ex as an indicator of continued Op Ex controls.

And given that the focus is on profitable growth and given that second quarter's, you know, flat on both counts, is, yet you're having real success in Asia, it looks like and some success in Europe. Are those trends expected to continue, specifically in those two regions? Or is that a bit of an anomaly?

Well, we've enjoyed some very strong momentum in -- in Europe and in the Asia Pacific region and are leading indicators suggest that Q2 will be very strong in those regions again. In the U.S., which is the other major geography for us, we're going through the transition or shift that Jason touched and that Ray asked about and so we're being cautious in our guidance for revenue in the region during Q2.

And I don't mean to probe too deep, but there seems to be a number of promotions whereby sprint and others maybe are giving away competitive products in exchange for two-year commitments. Is that problematic? Has that affected the results? Or is this something other than that specific point?

Well, we don't see that as problematic, in fact -- in fact at both sprint and Verizon the C Sierra Wireless AirCards are also participating in the promotions you mentioned. The steepness of the discount or the resulting end customer price varies by competitor, largely because different competitors are selling at different sell prices and presumably at different gross margin models but we're participating in the programs, we're benefiting from those programs and -- and we don't see any negative in the fact that the carriers are doing that. Effectively, that's market-making activity and investment by major carriers and frankly it's something we welcome.

Understood. And just the last point, both you and Peter mentioned legal costs. Could you just expand on that? I don't think I'm aware of any outstanding litigation that might run up a legal bill?

Right, we have some normal course matters which were disclosed in our filings, our annual filings. And we have one item which was also disclosed which has been costing us a fair amount -- specifically disclosed, which has been costing us a fair amount of legal expense month-to-month and that's litigation by a patent holder called MLR and we had a fair amount of legal expense fall into Q1 on that. There will be a little bit fall into Q2 as well and subsequent to the end of Q1, we signed an agreement with MLR under which we'll receive a royalty-free license to their patents for our current products and under which they'll abandon any further claims.

Fair enough. Thank you.

Next in the question queue, we have Andrew Lee from TD New Crest. Go ahead.

Can you give us flavor as to what products might be in the pipeline? It seems that the Op Ex seems to be growing and even half a million dollar increase will hurt the bottom line here. What's the future with the R&D development?

Well, I think first to start with the quantum, our adjusted Op Ex in Q4 was $7.3 million, our reported Op Ex in Q1 was 7.6 and we've attributed that to three things, only one of which is R&D. Our guidance for Q2 is a range of 7.4 to 7.6. So, part of Op Ex is foreign exchange and legal costs which we've touched on and the rest of the increase is actually a very modest increase in R&D spending on a -- on a overall basis and that spending is going into new product development, both variations of existing markets, we've brought to market in the 2.5G categories and also new -- new products. And -- other than getting any more specific in exactly what those products are because we're sensitive to early commercial disclosure, let me just remind you that -- that of our revenues in Q1, fully 87% of those revenues were generated on products that were not in our product line 18 months ago and so that's what our R&D spending and our R&D pipeline is all about.

Is it fair to assume that it's new technology or a form factor? Or is there any more hints you can give us at all, David?

Well, I think we're staying within the broad wireless and cellular wireless technology portfolios that we're experienced in and -- and so it won't represent a major change in -- in the underlying wireless technology.

Okay. What was the -- how was the book-to-bill versus the last quarter?

Book-to-bill was consistent -- it was below 1 and consistent with Q4 and we expect that to continue to be the case until we run off the end of those -- of the volume contracts.

Okay. And the CDPD in the quarter, was there any AirCard related CDPD? CDPD? Or was it the ruggedized in the OEM?

I will comment, this is Jason. There were significant AirCard 300 sales, that's the AirCard for CDPD, more than we anticipated. And also a significant mix of our MP product line.

And so that was a blip or you expect the 300 line to continue to sell?

You know, we -- we -- we anticipate that it will continue to decline, actually, as a percentage of our sales and that is reflected in our Q2 guidance.

Less than 10% for CDPD as a whole?

Yeah. And to give you a segmentation there in Q4 and Q1, CDPD was 12% of revenue and in Q2 -- in -- in tight insider guidance is an assumption that CDPD will decline from 12 to 5%.

Okay. So last question, then, the -- is the -- is the smart phone market a viable market for you? Or is the price point for the -- the modems too low versus the competitors? So, if you look at the [INAUDIBLE] and or the Microsoft smart phone offering?

Well, both of -- you mean the market for selling embedded modules to makers of smart phones?

Correct.

Okay, well that -- that's a market that's of some interest to us and frankly most of the business that's been done by other companies selling modules to handset manufacturers has been done in markets where there's a significant time to market urgency and so the -- the -- the margin stacking, if you will, involved in buying an embedded module is not as critical an issue to the customers as is getting to market quickly. So, whether or not that's a sustainable business over the long haul, we don't know, to be quite frank. But if we saw the right opportunity there in the modules business we might participate there.

Okay. Thank you.

Next we have Glenn Tracey, Pacific International Securities. Please proceed with your question.

Thank you, congratulations on the good quarter.

Thank you.

A number of my questions have been answered already, I will touch on a couple of things. First, David, can you please repeat what you said the percentage of revenue came from top 10 customers in Q4?

These are -- we actually -- it's not top 10, we report each quarter on the customers who are over 10% of our revenue.

Okay.

And we report in aggregate. So, in Q4, our top -- the -- it happens that three customers were over 10% each and in total, they represented 46%. In Q1, by coincidence, three customers were over 10% each and unlike Q4, in Q1, they represented 36% of our total revenue or a decline of 10%. And -- and that's indicative of the broadening of our markets and channels and the fact that our customer concentration risk is going down over time? Okay, thanks for the clarification.

With regard to your guidance for Q2, you: Somebody made a comment about the geographic segmentation, expected in Q2 to be strong for Europe and Asia Pacific again. Do you expect essentially the same distribution of revenue from those areas? Or are you expecting any kind of sort of significant shift but still balanced toward Europe and Asia?

I'll comment on that. You know, I think we've -- we've already demonstrated over the last several quarters rapid growth in Europe and Asia to the point now in Q1 it's representing close to 40% of our business. Will it continue to grow at that rate as a percentage of our business? I would doubt it. I think it's going to probably moderate a bit, but continue to account for a significant percentage of our business. So -- and there will be minor fluctuations quarter-over-quarter, but for us, we feel pretty good at the 40ish percentile mark.

Okay, and Jason, I believe you mentioned there are 35 GPS carriers worldwide who tested and certified the 750?

That's correct.

How many how many of those have the product commercially available right now?

All of them.

Okay, so...

Now, let me check that. Not every one of them will buy and stock and distribute the product themselves. In several cases, and in fact, in probably more than half the cases, distribution and sales is actually accomplished by a local distribution partner of ours. So, there's kind of a -- there's two hurdles if you will, when you enter -- when you go into a different -- into a new geography and new network. Number one is the product generally has to be approved and certified for use. Then, the carrier has to decide whether or not they are -- they themselves will buy and distribute the product. And in many cases, as I've indicated, our -- our actual commercial entry into the market after being approved for use on the network has been through third party of ours and distributors.

Right. Okay, I guess I was a little bit confused because when you renegotiated with AT&T, I think at that time it was indicated that the 750 would be available, but there was a long delay until you announced this past quarter that the 750 was now commercially available. So, I thought there would be that kind of delay with the carriers you mentioned.

Yeah, for clarification, we've -- we've been getting those carrier approvals on GPRS over the course of 2002 and that's continued into 2003 and the -- the particular timing of AT&T's approval is -- is uncorrelated to any other carrier.

Okay. Just one last question with regard to the MLR litigation, you commented about negotiating a royalty-free license on existing product. Is that then to say that on future product you expect to have a licensing agreement with MLR?

Well, no, I didn't mean to suggest that. The license is a -- a license we are purchasing at a nonmaterial level of investment and it's royalty-free and it licenses their present -- their present patent portfolio for all of our current products and providing our new products stay within the same product categories that are current products are, we will be licensed for those, as well.

I see, thanks, thanks very much. Okay.

Excuse me, we have Jason Foster with River Capital. Please proceed with your question.

Hi, gentlemen, good afternoon. Sort of first question, I just wanted to -- kind of bigger picture. We went through the granularity and the details, but your view of what the carriers are doing and what their expectations are of the market? And the other distribution channels you put into place, you've been taking great pains in the last several quarters to exceed the channel with the Ingram Micros of the world, the SITRIX, and it seems they're behaving differently than a year ago. So, David, or Peter or Jason, can you talk about the changes you're seeing and what other expectations are for the market?

Sure, this is Jason, Jason. I will comment on that. I -- I -- I'd say in general, your -- your view is pretty much right on, over the course of the year and -- and in concert with the 2.5G service launches, carriers have started to pay a lot more attention to a data as an important business stream and have put a lot of their corporate marketing push, if you will, behind the data services, recognizing the importance of getting new sources of revenue and increasing RPU and improving corporate customer penetration and the like. So, a general trend is data is important to carriers and we see them investing and pushing significantly harder in developing the wireless data marketplace.

The second development I'll highlight to you is -- is other indirect channels and you touched on them briefly. We think it's important, I think the carriers now believe it's important to have distribution, diversification in the data channel and to include those distributors and borrowers who are traditional IT distributors and borrowers and who are experienced in deploying data solutions. So, we are actively recruiting, training IT bars and distributors and we're doing that in cooperation with our carrier partners, as well, in order to establish that distribution diversification and I think that they are finding the carrier compensation model and the business prospects quite attractive.

Is that similar to the sort of acquisition cost, the way they've looked at the voice world? Are they taking the same model and applying it to the data world as well?

Sure, absolutely.

Do you know what the numbers are like or sort of maybe who's aggressive? It seems they also have sales forces, I don't know if you have any numbers of the size of the sales forces that the carriers seem to be putting into place.

Well, I -- in terms of customer acquisition cost and how that differs from a data subscriber to a voice subscriber, I'm not sure I could accurately comment that. I will say, though, that the -- generally speaking, the business sales organizations of the wireless carriers tend to be those most engaged with the direct selling of wireless data services and devices.

Okay. My second question is -- is sort of end user demand and sell-through and everyone's been asking several questions trying to get better understanding of what that looks like and obviously these large contracts have blurred that a little bit. But we have, I don't know, six months of data underneath your belts and you guys seem to be getting more comfortable with those matrix look like, but can you qualitatively share what you're seeing in terms of developing from an interest standpoint? And just, you know, there's other sort of earlier cycles where you can see that certain amounts of "X" leads to 10% or 15% or 5%, what the sort of growth numbers look like, as we should be looking at this being such an infant market and just starting. Can you kind of share a little bit of your experiences or what you're hearing back from customers or what you're seeing in sell-through?

I can comment on our own sell-through first. As I commented earlier, our sell-through over the last 12 months has increased substantially and -- and we have our own internal plans for -- for sell-through and in Q1, we met those internal plans. So, clearly the market adoption and user adoption delivered on our expectations in Q1 and the 12-month trend has been very good in terms of end user adoption and that's being driven by a number of things, right? Better services, faster services, good aggressive pricing by the carriers and aggressive promotion on the part of the carriers and... Leveraging new IT channels of distribution who are pulling in, you know, new customers into the wireless fray. So, I think there's a confluence of -- of influences here that with -- that are -- that's definitely driving what -- what we view as increased end user adoption.

That's interesting, that brings me to another question, when do you hit your sweet spot? It seems like a lot of the analysts are waiting for an IT rebound and, you know, I guess wanting to see printer sales going up into the big macro push, but is it a function of that? Or is it a function of educating the -- the -- the customer base to why they need your product? Or is it a network issue? Is it a next generation needs to come out? Is it 1X before you get good demand? How should we be looking at that for this market?

Well, I -- that is a multiple question in one!

There's a few there. Maybe I can point out that management is available after the call here for any follow-up or clarification-type points and maybe that basket of questions would be easier to address that way.

Okay, but just is it -- how should we look at that, when do you hit your sweet spot, do you think?

Well, perhaps what I'm saying, Jason; there is no one simple answer to that so it's not within our ability to say exactly when the whole industry hits a sweet spot. Certainly we've got our business where sell-through's increasing, we're profitable, we're cash flow positive and we've generated some very good growth in international markets, we're going through the U.S. market shift we've described and in -- with the backdrop of good, solid on increase in end customer demand. Beyond that, what's the sweet spot where growth accelerates beyond the 24% year-over-year growth we recorded last year under very tough spending, enterprise and economy conditions, we don't know. And that's really something for the market to think about.

Okay. That's fair enough. How do you feel about that? Sort of what --

I feel -- I mean personally I feel great. There aren't -- very many companies that grew 24 % last year, like everybody, we grew 121% the year before that. So, we're -- we're seeing growth, we're seeing a return to profitability. We're seeing much broader distribution of the technology and much broader geographic adoption and distribution. Our customer concentration risk is going down, I mean we feel like we're in a position of a strong company that's getting stronger through difficult conditions. We don't think all of our competitors can say the same thing and how that all translates three months and three years from now is -- is a crystal ball exercise and that's -- that's, you know, that's not for management, really.

Well it seems to be positive. Thank you very much, gentlemen.

You bet, thank you.

Next we have Deepak Chopra, National Bank Financial. Please proceed with your question.

Good evening, guys. David, historically the company has done a very good job whenever developing new products to have a contract in hand. You know, earlier in the call you mentioned the company working on several new items. Is it fair to assume you're going to follow the same methodology or the opportunity has presented itself? And that's why you're developing it or is this something the company has proactively done.

I'm often asked that inside the company. Sometimes -- because we've had a handful of large volume contracts with significant commitments that -- that anchored some new product developments, it's often the perception that we require a large contract before we will do a major product development. You know, the company's -- the company's actually operated both ways pretty well at all times through its history and products like the AirCard 300 and the MP 200 and some of the more recent launches like the MP 750, the GPRS version of the MP line, these products have all been introduced without any significant advanced commitment by a carrier or end customer, so, I think you should expect us to do business, you know, we -- we do business whichever way looks smart to us at the time. If we can get a large end customer or carrier commitment to a new development that we believe in, then we will do the new development. Someone offers us a big commitment and we don't believe in the product, we won't do it. If we believe in an a product or opportunity enough, we will invest our own dollars without a commitment. That's a significant part of what we're doing in our current R&D spending.

I wondered maybe on the same trend lines, there's been a lot of talk about the carriers and, you know, that's something we've all talked about before with you guys, are you looking down that road map more so now, introducing a combination card? Or are the carriers coming to you and asking you for that type of product at this point?

Well most of our carrier partners are active in one way or another in 802.11 business ventures. So, we see the -- the white area technologies and the 802.11 local technologies ending up being put under the umbrella of service providers who offer both kinds of service. And -- and so there's -- there's a range of discussions and views on the market opportunity that come out of that. Certainly with our partners and with us. We're not -- we're not setting any expectations around a 802.11 and white area combination card simply because our assessment is the window of opportunity for that is very short and the vast majority, in fact, if you look at Dell's forecast as a leading indicator, all of Dell's products that are targeted for business customers, substantially all of them are expected to be 802.11 embedded by year-end this year. And so in an environment where the 802.11 is already going to be inside the computer, we don't see a lot of new value and we see some redundant costs if we put 802.11 in the PC card.

Fair enough.

Okay, that said, we're also -- we're perhaps underrated as a software company, you know, more than half our engineers are software engineers rather than hardware engineers and we're very well differentiated with products like watcher and other software value ads we provide to our customers and -- and it makes sense that 802.11 communications and white area communications, particularly if they're going to be offered by common service providers, that the software and product compatibility for the two technologies be very well worked out.

Okay. Just one more question: In terms of your distribution channels, when shipping [INAUDIBLE], some of those shipments, if they're related to the large carrier partners, Verizon, Sprint, AT&T, are some of those shipments carried under the larger umbrella agreements with the larger carriers?

It varies from carrier and agreement to agreement but as a general answer, yes.

Okay, so -- so like where the top three customers are 46% shipments are that -- under the umbrella agreement will be larger because you're shipping it through a different channel.

They could be, although again, our top three customers in Q1 were not those three volume carriers.

Okay.

Are you with me? So, there's a little bit of overlap, but it's not the same list. So... I don't think you -- you should add -- we said for Q1 the top three customers that with over 10% each totaled 36% and there isn't a significant resell or channel-add to that --

Correct.

Based on looking at the actual data. I mean in principal, the question you're asking is absolutely true, but in practice it's not a big effect.

Fair enough. And are the top three customers all carriers?

No.

Okay, thank you.

Next we have John Bucher, Gerard Klauer Matteson.

Thank you, one question for you, it's on EVDO, I'm sure that you all have probably participated in some of the trials soft launches and what not that have been going on. David, I'd like to get your outlook on since Verizon has got a trial ongoing and since you've penetrated Asia significantly and have EVDOs in Asia, what's your outlook on EVDO?

John, this is Jason, I guess I will comment on that. EVDO from a -- we view EVDO from a carrier perspective as growing in importance and -- and you mentioned the Verizon decision to implement and launch market trials in D.C. and in San Diego. We view that as an important first step to perhaps what may be broad adoption of -- of EVDO. It's probably not going to happen overnight but clearly if Verizon pulls the trigger on nationwide EVDO deployment, you know, then suddenly EVDO becomes a much more important technology for us to look at and continue our investments in. As you probably know, we've already invested significantly in EVDO product development and have already participated in the early Verizon trials. So, I think -- you know, I think over time, summing it up, I think over time, we will see EVDO continue to -- to grow in North America and -- and in Asia as the -- as the primary geographic focus.

Thank you very much.

Next we have Chris Umiatowski with Yorktown securities. Please proceed with your question.

Hi, guys, thanks very much and I think you had a decent quarter, so, congratulations. I wanted to talk a little bit about AirCards and the way customers use them. I was hoping you might be able to give us some data on how often you think customers are actually buying an AirCard with the intent of just using it as a data pipe with their own applications that they already have, like e-mail programs, web browsers, et cetera, versus how often people purchase an AirCard with with a bundled solution, some sort of software that's specific to their application? And how you see that changing over time.

Chris, sorry about that, we had a phone issue. This is -- this is Jason speaking on -- on that issue. That's a tough to answer, I think over time, the trend will definitely be for people to use their AirCards with more broad-based existing applications that they currently run on on their laptop computers. To give you a segmentation split on, you know, what happened in Q1 in terms of percentage of customers doing that and percentage of customers either implementing bundled solutions or well-defined vertical market solutions is tough to say. I will say as a trend, definitely broad-based existing applicables being deployed over wireless is going to grow as a percentage of the overall -- as a percentage of the overall market and I think the involvement of guys like Citrix and Checkpoint and Microsoft, seeing their involvement get much more active and aggressive is an indication of that trend.

Okay, thanks, Jason. So, is there any software work involved in making that happen, i.e., porting existing applications to some sort of platform that makes them more wireless-friendly?

Yeah, sometimes yes and sometimes no. I mean we -- we've spent a lot of time in our own wireless-ready alliance organization working on just that. Working with partners to make existing applicables more wireless-friendly. However, there are existing applications like Citrix, that's a fin client and -- and -- and very thin pipe applications that already natively work quite well over wireless. You know, there are other applications out there that -- that aren't quite as wireless-friendly. The providers of those applications who view wireless data as important are already making efforts to make those products more wireless-friendly. So, I think, again, that's a trend you're going to see over time, more broad-based, existing enterprise applications becoming more wireless-friendly over time, recognizing the thin -- the thin pipe nature of wireless.

Okay. I appreciate it. Then, the other thing I wanted to talk a little bit about was pricing of the product. You know, obviously every channel partner that I talk to is telling me that over time the pricing has to come down and you guys are making improvements in your gross margin due to lowering the cost. Can you talk about what you might be seeing out there? And not so much in terms of pricing pressure, but in terms of alternate ways that packaged, you know, bundled solutions can get the price of the actual, you know, initial outlay of cash down as opposed to, you know, just doing the -- you know, the carrier giveaway model, are you seeing anybody sell bundled solutions, where you know, application-specific software is sold to a particular vertical where they are the ones subsidizing the AirCard rather than the carrier?

You know, I'm going to interject a thought there. That question's really gets different answers if you look at the enterprise market versus if you look at the consumer or small business market. In the enterprise market, the price of a PC card for wireless is an inconsequential component of their total per seat or per employee cost of deploying their -- their information technology solutions and their remote access or remote mobile solutions. So, in the enterprise market, nobody has to bring that price down to make it viable. It's already viable. In -- in small business consumer markets, the price point on the hardware, as long as -- along with very critically the price point on the service, are -- are -- are important factors and for those markets, the key agent of that kind of financial bundling or engineering is, in fact, the service provider or the carrier. They lower the up front cost of the hardware by securing a commitment to, you know, a contract for services. And frankly, even -- even without that effect, if you take data RPUs in the 60 to $100 range per month it only takes a handful of months of the service revenue to have already paid for the entire PC card and the customer acquisition cost. So, we think that there's room for carriers or service providers to do that. In fact, they are doing it as you've seen and other people have commented on and -- and a continuation of that should increase penetration into small business-type markets.

Okay, thanks very much. Now, the last question I have with regards to the OEM business, I think you said your OEM business was down in the quarter, just wondering if you could generally comment on, you know, any recent design wins in that business? What are your expectations going forward in the next few quarters in terms of OEM business? Are you still seeing it and is it just lumpy or something slowing down for you?

It's lumpy. This is Jason commenting on that. The OEM business historically has been and continues to be a lumpy business. It's, you know, it's a business with a lot of customer concentration risk and when you win a big OEM deal, you feast on that customer for some time and then have to win the next one. So, it's a lump and we're in the trough of a lump right now, is the way I view it.

Okay, thanks very much.

Next we have Gary Baker with Raymond James. Please proceed with your question.

Hi, guys. Going back to the book-to-bill, would it be safe to say that the book-to-bill would be greater than one in Asia and Europe and less than one in North America?

Yes.

Okay. Another point -- I -- on your cash flow statement there, you spent I think $600,000 on the purchase of intangible assets. Is that related to the MLR case?

No. The MLR agreement was reached subsequent to the quarter end and will be accounted for in Q2.

Okay.

Purchase of intangibles in Q1 was normal course that included things like third party intellectual property licenses related to ongoing product development. It also includes our own increasing investment in intellectual property as we invest in securing U.S. and other patents. The costs involved in securing those patents is capitalized. That is the cost directly associated with the patent, not all of the development work around it. And so over time our intangibles category tends to grow, if for no other reason that we're building an intellectual property portfolio of our own.

Okay. And last question, just wanted to touch upon if we go back three months in the guidance that you gave for the first quarter, you -- you know, you were guiding down sequentially and part of the explanation was it was a quarter of seasonal weakness. Now, going into the second quarter, you're guiding revenue to be flat to down. I just wonder for sort of three months ago, if the first quarter was seasonally weak, we would have expected the it second quarter to be up slightly. Just wondering what's changed from three months ago that would suggest the market is -- you know, weaker now than when you would have given the guidance three months ago for the first quarter?

Well, we don't feel the market is weaker now than three months ago and if I take you back to three months ago, we gave guidance that we just beat. We gave a range of 19 to 20, we delivered just over 20 and we also had in Q1 12% CDPD revenue. We're expecting that revenue to decline to 5% in Q2. As that declines 5% and if you assume that the guidance is flat for the sake of argument --

Uh-huh.

Then you can expect our 2.5G revenues to grow sequentially by 2.-- or by 7% in the quarter. That's about $1.4 million right there. In mix change from old to new.

The other thing that's causing us to guide at a flat level is conservativism in giving guidance while we're going through the shift in the U.S. market that we've described earlier in the call. Enterprise spending is constrained. Despite that, we're getting sell-through to -Elects. The economy is constrained; despite that, we've been able to improve our gross margins and that means not only product cost reduction, but we're doing pretty well on sell price, but we're moving from a large volume shipment schedule mode of operating in the U.S. market to a -- a rapid book ship cycle like we've already adopted in Europe and Asia and we want to get the timing on that wrong, so our guidance is cautious to reflect that.

Okay. Great, thanks a lot, guys.

Next I have Howard Lis with Griffiths McBurney. Go ahead.

Hi, it's Lawrence for Howard. Most of my questions have been answered, can you give me the head count at the end of the quarter?

185.

185. And actually just lastly, if you can update us on the competitive environment, whether or not you've experienced pricing pressure in particular of the OEM market?

Well, we always experience pricing pressure. That's a constant and a norm in our industry. In -- in the OEM market we have competitors who are offering solutions at a variety of price points. In the specific OEM customers with whom we have design wins, we have price stability.

I see. Okay, that's great. Thank you.

And we currently don't have any other callers in the question queue at this time.

Okay, operator. Thank you to everybody on the call. We appreciate your interest. As I said earlier, management will be available for any clarifying or follow-up questions, at the company's office. At the company's office. And operator, with that, we'll wrap up.