司亞樂 (SWIR) 2003 Q2 法說會逐字稿

Welcome to Sierra Wireless Second Quarter Results Conference Call. I would like to introduce your speaker, Mr. Peter Roberts and Mr. David Sutcliffe.

Thank you, operator. Hello everyone, this is David Sutcliffe, the Chairman and Chief Executive Officer of Sierra Wireless. I have here with me Peter Roberts, the company's Chief Financial Officer and Jason Cohenour, the Senior Vice President of Worldwide Sales and Marketing. This is our regular Q2 conference call and I will be turning it over to Pete there in a moment to talk about future financial performance, and Jason will be covering the acquisition of AirPrime and changes to the supply chain, our business highlights, back to Peter for financial guidance for Q3 and Q4, and then over to me for summary and questions here from the callers.

With that, I will turn it over to Peter.

Thanks, David. Good afternoon everybody. For the record of forward-looking statements disclaimer, forward-looking statements involve risks and uncertainties including, but not limited to changes in technology and changes in the wireless and data communications market. These forward-looking statements relate 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 and earnings depend in part on our ability to develop, manufacture, and supply products, which we do not produce today and that we define specifications. They also depend on closing AirPrime Transaction and successfully integrating the businesses. 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 and the summary. Our results are quoted in U.S. dollars and in accordance with U.S. GAAP. Second quarter revenue was $20.7m, better than our guidance of a range of $19m - $20m. Gross margin was 40.3%, better than our guidance of approximately 39%. Adjusted net earnings were $600,000, better than our guidance of a range of $100,000 - $300,000.

Cash flow was positive by $0.5m and is also better than our guidance of neutral. We had about $600,000 in recoveries from previously written down 2G inventories and this was offset by new inventories charges for other 2G products. The net effect was zero. To adjustments in the Q, our discussion which follows were described as adjusted excludes the following -- in Q2 2003, an additional Metrocom recovery of $300,000 and in Q2 of last year, net restructuring another charges of $36.1m.

Now, looking at our financial performance on a sequential quarterly basis. Q2 compares to Q1 in 2003, revenue increased to $20.7m from $20.1m, an increase of 2.8%. Gross margin percentage improved to 40.3% from 39.5%. Adjusted operating expenses were $7.8m in Q2 compared to $7.6m in Q1. Adjusted net earnings were 600,000 compared to $0.4m in Q1. Adjusted diluted earnings per share were 4 cents compared to diluted earnings of 2 cents in Q1.

Revenue increased due to a continued increase in sales coming from our 2.5G AirCard products. International demand continued to be strong in the Asia-Pacific region and in Europe. Our gross margin percentage improved despite difficult economic conditions. The improvement in gross margin resulted from a greater mix of 2.5G AirCard sales and the reduction in product cost.

Our operating expenses increased as a result of decreased funding from our research and development funding agreements to a comparable quarter, Q2 2003 compared to Q2 2002. Revenue increased to $20.7m from $16.9m, an increase of 22%. Gross margin percentage improved to 40% from an adjusted gross margin of 37%. Q2 2003, adjusted operating expenses was $7.8m compared to $10m in Q2 2002. Adjusted net earnings were $600,000 compared to an adjusted net loss of $3m in Q2 2002. Adjusted diluted earnings per share were 4 cents compared to adjusted diluted loss per share of 18 cents.

The segmented financial performance. Revenues byproduct segment; in the last quarter MP sales represented 7% and in this quarter of 4%. AirCard was 80% in the previous quarter and increased to 82% this quarter. OEM was 11% in the previous quarter and was 10% in this quarter and other 2% in the previous quarter and 4% in this quarter. Again, our AirCard sales continued to be strong in this quarter.

Revenues by distribution channel, Carrier in the previous quarter were 48% from a 47% in this quarter. Value-added resellers were 36% in the previous quarter and 40% in this quarter. OEMs were 15% in the previous quarter and 12% this quarter. Direct and other was 1% in both quarters. The three major indirect channels again continue to be strong. We expect product and channel segment percentages to fluctuate quarter-to-quarter based on our mix.

Providing revenues by technology, GPRS/GSM in the previous quarter was 43% of our revenue and is 54% in this quarter. CDMA was 45% in the previous quarter and is 36% in this quarter. CDPD and other was 12% in the previous quarter and 10% in this quarter. Our revenue from our new products that have been introduced in the last 18 months, in the previous quarter was 87% and this quarter 90%.

Segmented information on a geographical basis. The Americas in the previous quarter was 61% and in this quarter of 50%, Europe was 16% in the previous quarter and is 24% in this quarter, Asia-Pacific was 23% the previous quarter and is 26% in this quarter. Again, Asia-Pacific and Europe continue to grow.

To our balance sheet, comparing it to March quarter, March 31st, 2003, cash and short-term investments increased by $500,000 to $38m from $37.5m. This increase is due to cash generated from operating earnings, working capital flows, and the receipt of the additional Metrocom settlement. Paid accounts receivables DSO increased to 46 days from 35 days and still well below our target of 60 days. Net inventory decreased to $4.4m from $7.5m. CDPD inventory is less than one quarter of this amount.

Now, I'll turn it over to Jason.

Thank you, Peter. I'm going to be covering some of the business development highlights from the quarter, and I'll speak first to the acquisition of AirPrime. On June 16, 2003, we announced a definitive agreement to acquire AirPrime, a privately held, leading supplier of high-speed CDMA wireless products located in Carlsbad, California. Integration planning is well under way and implementation of the integration plans will commence once the deal closes, which we expect to occur in August.

For those interested in operating expense synergies, I'll share with you that the Sierra Wireless headcount at June 30th, was 188 employees. AirPrime was 86 employees for a total of 274 employees. As a combined company, we estimate total headcount on December 31st of this year, will be 242 employees. This represents operating expense synergy of 32 positions or 12%. We expect the combined company will be a well-positioned market leader with a broad product line, innovative engineering, Blue Chip customers, global channels, and a strong balance sheet.

Moving to the supply chain, during the quarter, we implemented significant changes to our supply chain. These included the transfer of global fulfillment and CDMA product manufacturing to Flextronics in southern China. By using Flextronics' fully integrated supply chain services, we fully expect to reduce product costs, improve alignment with our increasingly international customer base, and achieve increased operating efficiencies and scalability.

We expect to purchase finished goods closer to the time of shipments to our, customers thereby reducing our working capital requirements associated with carrying inventory. Previously, fulfillment services were provided by GlobaWare in California, while CDMA production was handled by SCI-Sanmina in Mexico. We continue to have GSM production located at Solectron in Mexico and [inaudible] and specialty production at Creation Technologies in Canada.

Moving back to business development activities, during the quarter, we signed a distribution agreement with Panasonic Canada, the division of Matsushita Electric Industrial Company of Japan, one of the world's largest producers of electronics. Under the agreement, Panasonic will distribute our next generation product line including both CDMA 1X and GPRS products through its value added reseller channels in Canada.

Also together with Citrix Systems and Zumasys [inaudible], we announced that Momentum group, a leading supplier of contract textiles has equipped its North American sales force with a complete mobile solution that includes Panasonic Toughbook computers, Citrix MetaFrame software, and the Sierra Wireless AirCard 550 and 555. This new implementation gives Momentum sales representatives wireless access to critical business apps improving their response time and then overall customer sets.

In Asia, we announced with IBM China the availability of a bundled wireless solution using the Sierra Wireless AirCard 550, our GPRS PC card combined with the IBM ThinkPad T40 notebook series, a high end notebook computer with built in WiFi capability. IBM chose the AirCard specifically for its high performance wide area wireless capabilities and for its ability to complement in end-to-end mobile solution.

We also announced the commercial availability of the MP 750, the first of our next generation MP wireless modems. The next generation MP series which is built for vertical markets such as police, transportation, and utilities will include both the MP 750 for GPRS networks and later in the year will include the MP 555 for CDMA 1X networks.

Hot on the heels of announcing the commercial availability of the MP 750, we also announced our first customer win for the product the Mesquite Police Department in Texas. Mesquite chose the MP 750 for its durability in extreme environments, its unique security features, and its ability to provide fast access to mission critical information.

Finally, we announced the appointment of Charles Levine, formerly President and COO of Sprint PCS to our Board of Directors. Chuck has more than 25 years of experience in building businesses for some of North America's largest companies. Chuck's expertise in business strategy, marketing, and sales will prove invaluable to our team.

But before passing back to Peter, I am going to wrap up with a few general business comments. Our business on the quarter was fairly linear across the 3 months. As Peter mentioned earlier, Europe and Asia Pacific sales continue to grow nicely. Our top five customers in the quarter represented 63% of our total business. Two of these customers were from North America, two from Asia Pacific, and one from Europe. None of our customers represented more than 20% of our total business.

Some of you may have heard that T-Mobile rolled our some aggressive wireless data pricing. They had indicated to us that the market response has been favorable, but it's too early to tell to establish a trend line for what the new pricing plans mean to demand growth for AirCards. Overall, reported sell through is trending up significantly, and specifically our North American channels reported sell through that significantly exceeded our sales into those channels.

Now, I will pass the presentation back to Peter.

Thanks Jason. In this guidance is a continuation of the higher than normal risk resulting from uncertainties associated with the acquisition of AirPrime, the timing of volume shipments to channels and with the late event customer adoption of newer products. Our guidance reflects the planning assumption that the Company will commence consolidating financial results with AirPrime on September 1, 2003.

We expect to incur AirPrime-related restructuring costs in Q3 of 2003 and integration costs in Q3 and Q4 of 2003. We expect integration activities to be substantially complete by year end. In both quarters, we expect to be profitable excluding restructuring and integration costs. In our guidance, all of our figures are estimates and are approximations.

So going to Q3 of 2003, our revenues a range of $24m - $25m, gross margin 39%, operating expenses a range of $8.4m - $8.7m, restructuring costs $2.5m, integration costs of $1.5m, a net loss a range of $2.9m - $3m or 17 cents per share loss. Net earnings excluding restructuring and integration a range of $0.9m - $1m or 5-6 cents per share, and for cash we expect it to be neutral excluding cash cost related to the acquisition of approximately $4m.

For Q4 a revenue range of $28m - $30m, a gross margin range of 38% - 39%, operating expenses range of $9.8m - $10.4m and nil restructuring costs. Integration costs range of $1.1m - $1.5m, a net loss of $200,000 - $300,000 or a loss of 1 penny per share, net earnings excluding restructuring and integration a range of $0.8m - $1.3m or 4-6 cents per share, and for cash to be neutral.

With that, I will turn it back to David.

Thanks, Peter, I appreciate that. First item I'd like to touch on is, in fact, Peter's retirement. Peter Roberts is our Chief Financial Officer and he has decided to retire next February 2004.

Peter joined Sierra Wireless in January, almost 5 years ago, January 1999. He has been instrumental in helping us become a leading wireless solutions company. He joined the company when it was a privately owned company. He led our efforts through the IPO in the Toronto stock exchange, a secondary offering and listing on NASDAQ through growth in revenues for the company from $28m annually to a run rate of about $80m.

He has built a strong team in finance and processes and systems to support them, and over the past year or 18 months whether it's a very difficult conditions including the business restructuring that we implemented in June a year ago. In announcing his retirement today, Peter is retiring the company on a steadier footing. He is planning to stay with the company through the close and integration of the AirPrime transaction and through the completion of our 2003 audit.

I won't say thank you or goodbye yet because Peter is going to be here for some months, but between now and his actual retirement date, in order to ensure an orderly transition we've engaged Korn/Ferry specifically the [inaudible] practice to assist us with an executive search for Peter's successor. In the meantime, it will be business as usual.

Turning to a summary then of the developments for second quarter, the second quarter revenues, gross margin, net earnings and cash flow were each better than expected, and for the fourth consecutive quarter we've generated growth over the comparable quarter and net profit and positive cash flow. Sales of our newer 2.5G products and especially AirCards in international markets are driving these operating improvements, and in North America the sell-through reported by our channel partners is up.

Integration planning for the AirPrime combination is progressing well and we expect to close the transaction on schedule in August, after which we'll fully integrate the businesses and commence consolidated reporting. We expect the transaction to become accretive in Q4 and to provide significant accretion in 2004.

As we've indicated for a number of quarters now, we are focused on growing the business profitably; that's the basis of how we are operating the company. Our priorities remain the expansion of our distribution channels, sell-through of our products to end customers and continued investment for future growth as evidenced both by the acquisition and by our continued commitment to significant R&D spending.

Overall by assessment, our Q2 operations were very solid and our Q3 and Q4 guidance are significantly improved reflecting both the acquisition and our current outlook for trends in the business.

With that, our operator will be happy to take any questions.

Thank you. Ladies and gentlemen, if you have a question, please press the number "1" on your touchtone phone. If your question has been answered and you'd wish to leave the question queue, please press the "#" sign. If you are on a speaker phone, if possible, please pick up the handset first before entering the request. When I state your name, please proceed with your question. Thank you

The first party that we have in the queue would be Mike Walkley from RBC Capital Markets. Please proceed with your question.

Hi, it's actually Amit Kapur for Mike. First, I just want to say sorry we'll be losing you Peter. Best of luck in the future.

Thanks Amit.

Thanks. Just a couple of quick questions. I was wondering you kind of touched on this for North America, but can you give us an update on overall channel inventory, maybe give us an indication of what it did in Europe and Asia?

Yes, I'll comment on that. Sell-through overall was strong for the quarter and in fact sell-through overall across all the regions were up significantly in the last four months. We've seen a significant step function over that period.

Okay. And also can you give us a sense of any new promotional activity that carriers maybe planning in order to advertise mobile data services over the next few months.

Well we have seen, I mentioned of course the team overaggressive rate plans; we've seen candidly nothing but aggressive behavior out of the carriers, not only in the North America but globally as it relates to promoting and sending the adopting of wireless data services. So I for one certainly, don't expect that behavior to change.

Okay. Can you disclose what your book-to-bill was last quarter?

No, we can't disclose that specifically.

Okay. Thanks anyway.

Thank you. Next we have Howard Lis from Griffiths McBurney & Partners. Please proceed with your question.

Okay, couple of sort of minor questions. First the 300,000 metric on recovery, what line item is that in your expenses?

G&A.

Okay Great. And your other income jumped little over a 100,000 this quarter, what drove that?

It is foreign exchange. The translation affects to foreign exchange and not really operating expenses there other income, so that is where we have shown that. In managing our risk to exchanges, we have purchased some Canadian dollars and we had a gain on those dollars at the net gain in the end of the quarter.

Okay about a $100,000 of gain?

Little less than that actually. Because there is also interest in there as well don't forget.

Yes. Okay. And are you continuing to do that going forward or are you still going to -- you are playing with the Canadian dollar?

Well to be clear we are not buying Canadian dollar forward contracts. Most of our cash and all of our reportings are functional currency in U.S. dollars. So what we have done is estimated the Canadian dollar component of our operating expense for the next few quarters and purchased those Canadian dollars.

So, we don't normally hold Canadian dollars in advance of acquiring them. And that those purchases will did expose us in Q2 to the opportunity for upside or downside and they will expose us to the same opportunities or risks in future quarters.

Okay, great. In terms of your guidance can you just indicate for -- to the next two quarter in your revenue projections how much is AirPrime contributing?

We haven't provided in the guidance package except separation between [inaudible] standalone basis and the combined entity simply because we are already the public company and they are still a private company. They are not set up to do public company disclosure cycles, the same way we are. So we are uncomfortable segment in that information.

Okay. If we are just trying to get a sense of your existing business today, how that is expected to grow over the next two quarters; you are not able to give us that information?

Well, qualitatively we were comfortable with the street expectations if the consensus expectations for top line for the next couple of quarters and they have suggested modest growth in the aggregate on our standalone business.

Okay. You are talking about something as $4m in cash in Q3, is that simply the restructuring and integration cost combined and that will be the estimated drop in cash that you have?

That is correct.

Just one final question, when we have the AirPrime announcement, you indicated you would be giving them a line of credit or a loan for $2m, is that aggregate?

We have put the operating line in place with the ceiling of $2m and we have advanced an initial disbursement under that operating line which is the fraction of the $2m.

Okay, great. Thank you very much.

Thank you. Next, we have John Bucher, Harris Nesbitt Gerard. Please proceed with your question.

Yes. Thank you. Regarding the AirPrime acquisition, I know you can't break out the revenue but can you say how the OEM mix shift might change over the next couple of quarters?

What we think that AirPrime's mix will be approximately evenly split between OEM and PC cards. And so they are adder to our revenue which will affect our mix in those proportions.

Okay. Then for Peter, do you expect any tax rate changes as result of the acquisition?

No we don't, John.

Thank you very much.

Thank you. Next, we have Tim Luke from Lehman Brothers. Please proceed with your question.

Thank you. I was wondering with respect to the gross margin outlook. You look like it's going to be slightly lower in the fourth quarter than in the third quarter. Could you just give a little color on that and then also if you could give some color on the fourth quarter operating expenses? It looks like they're reasonably significantly higher than the third quarter resulting in potentially EPS range which was slightly lower in the fourth quarter from the third quarter. Could you give us some color on that, Peter?

Sure. The gross margin outlook goes down by a percentage point in the Q4 guidance simply because we get a full quarter in Q4 mix of the AirPrime revenue. Between our revenue outlook and their revenue outlook in Q4, we are expecting OEM to make up a slightly higher portion of our overall mix. So, there is no gross margin erosion at an individual product level in our model, but rather a mix shift.

Just to reiterate our achieved gross margin in Q2 is 40 and our fraction percent we're guiding 39% for Q3, which has one month of AirPrime in it and we're guiding our range of 38% - 39% for Q4 which has a full quarter of AirPrime in it. So, what you are seeing there is a mix effect only. On the Q4 operating expense, the OPEX was significantly higher than Q3 in almost entirely as a result of showing all three months that are full quarter in Q4 of consolidated operations with AirPrime.

In the Q3 model, remember we start consolidations on September 1st, so there is only one month in the Q3 numbers. And finally to the EPS effect, obviously, as we complete the combination we will have the new shares go out and our EPS even with the benefit of that extra revenue and operating earnings the EPS has to absorb those extra shares.

Can you give us the share counts that we should stop the model for the third and fourth quarter?

We have 16.3m reported in June 30th.

Yes.

We are expecting a 20.0m at the end of each of the third and fourth quarters.

I just want to check if there is a [waiting] calculation on Q3, I' am sorry.

That would be -- yes.

I am being corrected on that [waiting] -- but the [waiting] calculation that were using in guidance for Q3 is $18.25m and for Q4 is $20.8m.

Lastly, it looked like you have had a big quarter in the Europe in GSM, could you give us a some sense of who some of the primary carriers might be?

Yes. Tim, this is Jason. I'll take that. We've got good broad based activity in Europe, but I would say the U.K. is probably our strongest market in Europe, and in particular, we were having significant success with the Vodafone. We've also got good traction in Spain with the Telefonica and KPN in the Netherlands to mention specific other carriers.

Thank you and good luck Peter.

Thank you, Tim.

Thank you next we have Ray Sharma from BMO Nesbitt Burns. Please proceed with your question.

Thanks for taking the question and good luck as well Peter to you. Yes and I just have a couple of question guys. One is I was wondering if you could maybe begin with just a description as best as you could possibly give us the overlap that you found when you did the analysis of the pro forma financial between AirPrime and Sierra, as far as the when you came to final conclusion on your guidance?

I am not sure we understand the question, but Jason did report on the headcount overlap or synergy and both in terms of number of people and percentage of total headcount. Is there something you want us to be more specific on?

Yes, sort of, [so to] the line and [so to] the word top line in that question.

So if we understand the question, what overlap was in our revenue plans?

That's correct.

We were competing even today in some channels and carriers particularly on PC Cards in North America and so that's where there was some potential revenue overlap. In the outside of North America, AirPrime sales are modest and in the OEM business area, we have essentially non-competing customer basis.

Did you find that the overlap -- as far as the eliminations are concerned when you did the announcements, did you find it to be material to your guidance?

Well, I don't know that we look at that from a materiality test, but we made an assessment prior to signing the definitive agreement and then announcing our transaction in June, that there would be revenue overlap and we eliminated that in our internal financial models for the transactions before we proceeded with it. What we've seen since announcing doing those calculations in announcing the deal, we've gone into very detailed integration planning, which Jason has been heavily involved in. Today we've had very positive expressions back from most of the key customers and no reason to believe that revenue overlap or eliminations would be larger than our initial models.

Okay. Is there anything that you can provide us in terms possible upgrade cycle from [rapid eye] CDPD products from the install based to [rapid eye] GSM or even CDMA products?

Well, we as you know Ray, AT&T has previously made announcements regarding the availability of CDPD service in their footprint. That's cause some customers to be inspired to move to 2.5 to your 3D technologies more quickly. Candidly, our research and development in the MP series for the next generation platforms was then anticipation of just that. So, yes, I mean we fully expect there is going to be a migration cycle over the next 24 months. Most of the customers making that migration cycle don't move with light speed. They move pretty deliberately, but we do expect there would be significant migration cycle over the next 24 months.

For our purposes, I am wondering how we can analyze that if we could look your historical financials in this area and assume some sort of conversion, is there anyway that you would suggest is the reasonable approach to analyzing what the potential value of this could be this year?

I would say look at our guidance.

Okay that's fair enough. Last question -- just in regards to guidance and when you were taking the consideration day before you were saying about uncomfortable with your street numbers and then the overlap question that I asked, my understanding of what AirPrime was about to deliver in Q4, especially in context of [30600] was a relatively strong quarter in relation to the guidance that you provided.

Now, you don't know what exactly what I am saying in terms of what the number I had in my mind for what AirPrime is going to do in Q4 on its own. But my question to you is this, in your Q4 guidance, are you taking either a conservative approach in your opinion to what you think the company will be able deliver pro forma or is there anything else that is going on as far as what you're factoring into the overall guidance when you combined the entities?

Okay, well I mean obviously as you said, I don't know what numbers you are thinking about. And even if did, I probably wouldn't comment on them directly. So to the essence of your question, there are no unusual trends factored into our guidance for Q4. That is there is no trends on things that we have been talked about in one way or another. We once had a very stronger application for meeting our exceeding guidance consistently for many quarter in a row.

During the worst of the downturn, we struggled and sailed to consistently meet our guidance. For the last four quarters, as I recapped earlier, we have matched all of our key operating goals for four quarters in a row now. We are on a under promise and fully preformed management regime inside the company and in our communications or stakeholders, and that goes into every round of guidance we do. And that's true in recent history -- our guidance we've given today for Q3 and Q4.

As one closing comment I'll make in addition to that is that it has been for very long time that we had been providing a single quarter or forward guidance at a time. We did that even when some companies gave no guidance and we are now feeling reasonably comfortable, not without risk, but reasonably comfortable with stretching our guidance window to two quarters and this is the first time we've done that in a couple of years.

Okay just again, good luck, Peter. Thanks lot.

Thanks, Ray.

Thank you. Next we have Deepak Chopra from National Bank Financial. Please proceed with your question.

Good evening guys. Can you guys hear me?

Yes, we can.

Okay great. First of all, bookkeeping question, the OPEX guidance that you gave, does that include amortization or no?

Yes, it does.

Okay, just wanted to confirm that. If you could talk little bit about some of your big carrier partners in terms of the previously announced guaranteed contracts with Verizon, Sprint, and AT&T, can you guys give us any sense of how far long you've proceeded through those contracts at this point? Even quantitatively will be greater even qualitatively like how far down the road are we with that you guys have mentioned before you will avoid channel stocking at all cost and so that you can match sell through with sell-in and so maybe a bit of guidance around that?

Hi, Deepak, this is Jason. I will comment on that qualitatively. As you know, we have got large supply agreements with AT&T, Sprint, and Verizon in the U.S. With regards to AT&T, as you know, we renegotiated the size of that supply agreement last year, and as we discussed last quarter, we are pretty much in the process of fundamentally shifting from long lead to large volume commitments by carriers to faster book shift cycles that really reflect customer demand.

So on those contracts, we expect to fully retire the volume commitments by the end of this year and already with some of our carriers, both domestically and outside the U.S. where we are seeing a much more of a fast cycle book shift approach to business rather than big volume commitments in long lead time. So, that for us candidly is a good sign if return to our routes and lowers our carrier dependency. It's what we've historically done and it makes for a healthier business and frankly, better pricing and margin in long run.

Could you give us a sense, as a percentage of revenues, what business was turns business in the quarter?

The book shift during Q2?

Yes, like booked down shift or --

We don't have that in front of us, but it was a considerable proportion of our business. It's the majority of our Asia-Pacific and European business and those two segments together accounted for 50% of our revenue. It's a significant portion, although, I think I had stopped short of saying a majority of the other 50% of our business that we did in North America during the quarter.

Yes, like a carrier like T-Mobile will fall under that turns business there?

Yes, that's correct.

Okay. That's a great time. In terms of maybe just talking a little bit R&D, can you talk about maybe some of the projects the company is working on? I know we've talked quarter and quarter out about WiFi integration to maybe some AirCards and you guys have talked more about and maybe where the company is headed in terms of R&D and new products coming down the next 12-18 months or so?

Right. Well, our R&D investments are pretty considerable right now. In fact, I have reaffirmed for a year now that while -- post restructuring that while we are committed to operating on a profitable growth basis, the only way we think we can sustain the growth over the long-term is fresh R&D. Peter reported earlier in the call that in Q2, and this is a really incredible figure -- in Q2, 90% of all of revenue was generated by products that we started shipping in the last 18 months, that is relatively new fresh products. With the business where the new products contribution to revenues is as high as that the R&D pipeline is obviously very important and continues to be.

The AirPrime acquisition will increase our R&D capacity, it will broaden our product line, and the kinds of products or investments that we are making in R&D really fall into two categories. One, our extensions and additions to existing product lines and product categories, and some examples of that -- in the first quarter, we rolled out and update to the CDMA AirCards and in the second quarter, we rolled out the new MP750 for GPRS networks to take advantage of that CDPD install base and the anticipated customer migration over the next two years or so. And in the third quarter, we are expecting to roll out the CDMA version of the MP -- the MP555 for the same conversion market opportunity.

So, these are follow-on products and feature set enhancements within our existing product categories. We are also making investments in a new product category area and that's for a longer-term investment and payback horizon revenue and then things like the MP750 which we're already shipping. We're not at the point where it's commercially appropriate to disclose specific new products, we do that through commercial announcements, major trade shows, and financial markets briefings at the time that the commercial disclosure occurs. From a timing point of view, we like to make those commercial disclosures relatively close to when the product will commence shipments. And so that's what drives the timing of our more specific product announcements.

Do you think we'll hear something maybe in the second half of this year or would you venture down [to earth]?

I think in the first category of things that is new products and new versions of existing products, we have already been hearing about those things and I expect you'll continue to hear abut those kinds of things as the second half progresses. In terms of investments into new products categories, yes, I think it's realistic that we would have some initial commercial disclosure during the second half and that disclosure will be not too far in advance of those products becoming commercially available perhaps that would fall early in the new year.

Okay. Fair enough, one last question, in terms of ASPs maybe, in your gross margins, you've been to able to increase it? Have you been able to cost reduce your average selling prices at the same time? Are we seeing a trend line downwards both in selling price and cost-to-goods sold? Are we holding that flat at this point to most of your customers? Thank you.

Okay, well there isn't just single answer to that but as a general characterization we've been holding ASPs flat on some product lines and having ASPs decline gradually on other product lines. On the product cost side, we've made significant strides on product cost reduction on each of our major, the products that have the largest contribution to our P&L and in those major products ASP is flat or slightly down and the product cost is down and in all cases down more than any ASP erosion.

Great quarter guys and good luck Peter.

Thanks, Deepak.

Thank you. Next we have Chris Umiastowski from Orion Securities. Please proceed with your question.

Hi thanks. It is Orion Securities. Just a couple of questions guys. First of all, you have a very nice quarter and good luck to you Peter in the retirement.

Thank you.

Let's start off with again your guidance, you had a lot of questions on that tonight and here's another. I'm sure as usual you're trying to be as conservative, but realistic as possible. So rather than ask where you're being conservative and not, let's just ask it a different way. If the Treo 600 as an example product is a very successful product in terms of its launch in the fall as expected, do you think that could generate any significant upside to your guidance?

Yes, it could.

Okay and any qualification or quantification you can provide there?

Well not without issuing revised guidance. No we, things like new product, it's just for the benefit for everyone on the call, and we're acquiring AirPrime. AirPrime in turn has an OEM embedded module design win with the recently announced Handspring Treo 600. In our guidance for Q3 and Q4 for the window that we're consolidating AirPrime into our guidance, we have an element of revenue guidance that reflects a forecast of sales and modules to Handspring.

Back to your basic question, if the Handspring product is more successful than we've modeled then that would represent upside to our guidance and that's certainly one example of a number of examples where significant improvements relative to what we've modeled could create significant upside. In saying that, I have to add the caution that we've just extended our guidance window from one quarter to two, so our confidence level with which we set guidance in the one quarter window Q3 is higher than the confidence that we could apply to setting guidance for Q4 two quarters out. So, we don't intend to overheat expectations.

It's fair enough that's a good answer. The other question I want to ask you is with regard to CDMA products obviously looks like this quarter was quite a bit weaker than last quarter in North America, primarily, [rise has] fair statements so far?

Geographically yes.

Okay and so I guess the question is, are you currently as you are competing with AirPrime are you losing market share to AirPrime as it stands right now in your opinion?

I will comment on that. AirPrime has fairly recently commenced shipments of CDMA products to both Sprint and to Audiovox and through Audiovox to Verizon. So clearly, when there is another player in the two bigger CDMA channels, that's going to have an impact on shares. So I would have to say, yes, there has been an initial impact on channel share not necessarily initial market share but certainly channel share.

Having said that, Chris, as we look at the sell through numbers in North America which tend to be weighted in favor of CDMA, our sell through numbers for North America were quite robust and significantly exceeded our sell in numbers to those same channels. So that means CDMA sales to end users from those existing channels that were holding our CDMA products were strong.

Okay and when you monitor sell through that you are talking about just your own products are you looking at sell through pf competing products as well?

Well, it's hard about to get sell through on our own products. So--.

Okay.

So, it's even tougher to get sell through on competing products.

Okay, that's great because what I was trying to get out is whether the CDMA market actually deteriorated at all in the quarter or it was just more of a [inaudible] we had no entrance into the market so we just share?

Exactly two factors for Chris. It's not only a second entering into the market, it's also the fact that channels had over the course of Q1 and Q2 significant inventory.

Right, okay that's fair enough.

So it was a strong quarter of sell through of existing inventory which is should be a good forward indicator for revenue in future quarters.

Okay and then I will just leave it for other questions after one more here, just a very short one on Panasonic. You announced a deal in the quarter on distribution deal with Panasonic in Canada. Any idea if that can extend itself outside of Canada which obviously would probably much more significant?

Yes, I assumed you referred to the U.S. We've had a long standing relationship with Panasonic in both the U.S., and Canada, and Japan candidly for that matter. That long standing relationship has yielded good success in the past and I fully expect it will in the future as well. So as an existing relationship in the U.S., we are going to continue to leverage and end by the way in a relationship that contributed significantly in Q2 and will contribute significantly in future quarters.

Okay, thanks a lot guys.

Thank you. Next we have Andrew Lee from TD Newcrest, please proceed with your question.

With regards to the guidance, what is the [tax free] assumption? Zero, I assume?

Yes.

And the other income assumption, what's [we were] to assume that because a $100,000 swing certainly can result in better half cent swing in any one models here? Can you give us a sense on the other income line?

Not really, Andrew, because the swing factor there is the FX rate at the end of September.

Okay, and I understand that, but built within your guidance, what is it that you are actually building within there is that closer to 50 or 150?

We are not actually providing that information in the guidance Andrew so I am not sure we are getting that number or that question.

No, that's fine I was just referring back to the history of what you've done on the operating on that line?

It should be very modest.

Okay fine.

We are not assuming that we will make a habit of getting material gain or losses on our other income line.

Okay great and on the CDPD, I think outlook was for about a 5% contribution for the current quarter, looks like it was stronger than that? Are you guys seeing any rebound at all? I assume it's more so CDPD PC cards and then add on Q4?

You saw CDPD decline quarter-over-quarter. So certainly there wasn't a significant comeback and we do expect CDPD sales over Q3 and Q4 to continue to decline. Generally, we just over performed on our expectations in the second quarter.

Okay and moving to the AirPrime, AirPrime with regard to the product lines. Have you guys made any decision as to whether you will rationalize any of the lines at all?

Well, we've been going through a product planning process as part of the integration plan, and the general statement is that we expect to continue offering -- and this really in the immediate sense relates to PC cards. One of our intentions in acquiring AirPrime -- we expressed this hope fairly clearly in the June conference call, was we want to get an endured position of being a full product line vendor to our carrier partners, so that we are offering them a high-end, richly featured product suitable for enterprise customers as well as mid-tier products optimized for smaller medium business in consumer markets. So we want to have different products positioned at different price points Because of that logic, we are not expecting to make significant near-term narrowings of the product, of the Company's product lines in the PC card area.

On OEM products this is a business line where the sell cycle is longer; the benefits of the design win are significant and last for a full cycle in the OEM customers business. And so in that business, we would expect to continue to offer the small numbers of large customers the same products they are currently buying. So in a short-term, I don't think you should look for a significant product line consolidation. What you should look for is that we will eliminate, duplicate R&D efforts on new products and new features so that we have a common underlying R&D investment that manifests itself in multiple different products at different price points with different feature sets. That's really our thought process on having integrated the product lines over time.

And on the OEM side, David how should we think of the profitability or gross margin of AirPrime's OEM business versus your own on a comparative basis; would you say they are in line in the gross margin line below or above what you are currently doing?

It varies a little but as a general statement I think it's fair to say there are similar gross margins on OEM with a slight bias in some areas to being a few points lower.

Okay.

And materially a very similar business model on gross margin and pricing and product cost in the OEM arena.

Okay last question, if I do look at the net margin before tax on your Q4 guidance, it looks like you are at a better at 3% - 4% net margin. What are you guys driving towards as the long-term business model? What do you think is a reasonable target --- net margin even without a tax rate that you guys can achieve down the road?

Well, that sounds like a simple question, but there is another variable, which is growth and what we are driving to right now and have been for four quarters is profitable growth. So we are looking to balance earning bottomline profits with the investment required to grow the business at a rate beyond that of our peer group, and so that's the balancing act and Q4 reflects that.

On the one hand, it has a very nice profitability before integration cost, and on the other hand it has very considerable operating expense being invested particularly in R&D and channel expansion. So the near-term, we plan to continue to invest for growth while delivering a moderate profitability. As we get out of the near-term in the next quarter or two and look into 2004, we think both the AirPrime acquisition and its accretive effects and the opportunity to start generating some revenue and earnings out of the new product investments that we are currently making will have a very nice effect on top line growth and ought to allow us to be considerably more profitable on the bottomline.

To the question on what's the long-term operating model, it's difficult to give you a single point number because there is really those two variables -- growth and profitability.

If I just may on that in the operating expense for Q4, the run rate is about $10m, is that for us to consider that to be more of a fix number, i.e., there is a lot of leverage if you guys are able to drive its half line and maintain decent gross margins?

Yes, you should look at it that way much as you have been able to look at our operating expense over the last four quarters, as we are falling within a relatively tight fixed band.

Great, thank you very much.

Thank you, and currently, we don't have any additional parties waiting in the queue.

Great, operator. That is right on an hour. Thank you to everyone who's been on the call. Operator, we are all done.

Thank you ladies and gentlemen. This concludes the Sierra Wireless second quarter results conference call. We thank you for participating and ask you to please disconnect your lines now. Thank you for calling.