司亞樂 (SWIR) 2003 Q3 法說會逐字稿

Thank you for holding for the Sierra Wireless third quarter results conference call. I would like to introduce you to your speaker, Mr. David Sutcliffe. Please go ahead.

Thank you, operator. I am the Chairman and CEO of the Company and I have with me in the Company's offices, Peter Roberts, the Chief Financial Officer and dialed into the call from the CTIA Wireless Trade Show in Las Vegas, we have Jason Cohenour, Company's Senior Vice President of Worldwide Sales. Subjects we are covering are our third quarter 2003 results and providing guidance for the fourth quarter.

I will start by turning the call over to Peter Roberts who will cover forward-looking statements and Q3 financial performance. He will turn it over to Jason who will cover business highlights for the quarter and Peter will come back and take care of Q4 financial guidance. I will wrap the call up with a management update and a summary of Q3 and Q4 and then we will go to questions, as is customary. So, with that, I will turn it over to Peter.

Thanks, David. Good afternoon, everybody.

For the record, our forward-looking statements disclaimer: Forward-looking statements involve risks and uncertainties, including but not limited to, changes in technology and changes in the wireless data communications market. These forward-looking statements relate to, among other things, statements about future market conditions, supply 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 upon our ability to develop, manufacture and supply products which we do not produce today and that meet defined specifications. They also depend on successfully integrating AirPrime into our business and on bringing the VOq Professional Phone to the market. 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.

To our financial results: Our discussion which follows, were described as adjusted excludes the following amounts/items. In Q3, two restructuring and integration costs of $2.2 million, an additional Metrocom recovery of $0.2 million. So, to our financial results, our results are reported in U.S. dollars and in accordance with U.S. GAAP. For the three months ended September 30, 2003, our revenue was $26.2 million, operating expenses were $11.5 million, our net loss was $0.9 million, and our loss per share was .05. Third quarter revenue was $26.2 million, better than our guidance of a range of 24 to $25 million. Gross margin was 40.8% and that is better than our guidance of approximately 39%.

Adjusted net earnings were $1.1 million. This is better than our guidance of a range of 0.9 to $1.0 million. Cash flow was positive by $1.4 million. This is also better than our guidance of negative cash flow of $4 million. We had about 0.4 million in recoveries from previously written down 2g inventories. The net effect was about a 1% improvement to our gross margin.

Restructuring and integration costs for AirPrime came in well under expectations in Q3 at $2.2 million, a savings of $1.8 million. $300 thousand of the Q3 savings are a timing effect and these costs will be incurred in Q4, along with the balance of the expected Q4 integration costs.

Looking at our sequential results, comparing Q3 2003 to Q2 2003. Revenue increased to $26.2 million from 20.7, an increase of 26.6%. Gross margin percentage improved slightly to 40.8% from 40.3%. Adjusted operating expenses were $9.5 million in Q3 2003 compared to $7.8 million in Q2 2003. Adjusted net earnings were $1.1 million compared to $0.6 million in Q2. Adjusted diluted earnings per share was 6 cents compared to adjusted diluted earnings per share of 4 cents in Q2.

Revenue increased due to additional revenue from the sale of newly acquired products as well as a continued increase in sales coming from our two 2.5g AirCard products. Revenue from the Americas was strong due to sell through as well as sales of newly acquired products. Our gross margin percentage improved slightly due to product cost reductions that were partially offset by changes in product mix. Our operating expenses increased as a result of the addition of staff and projects related to the AirPrime acquisition, development and marketing costs associated to the VOq Professional Phone, and decreased funding from research and development funding arrangements.

Turning to a comparative review of our quarters. Q3 2003 compared to Q3 2002, revenue increased to $26.2 million from $21.1 million, an increase of 24.2%. Gross margin percentage improved to 40.8% from 39.2%. Q3 operating expenses increased to $11.5 million and adjusted operating expenses increased to $9.5 million, in each case, compared to $7.9 million in Q3 of 2002. Net loss was $0.9 million or a loss per share of 5 cents compared to net earnings of $0.5 million or diluted earnings per share of 3 cents. Adjusted net earnings were $1.1 million compared to $0.5 million in Q3 2002. Adjusted diluted earnings per share was 6 cents compared to 3 cents.

Moving now, to our segmented financial performance, revenue by product segment, in Q3, MP was 7%, AirCard was 68%, OEM was 21% and other was 4%. Our OEM sales were strong in this quarter. Revenue by distribution channel: Carriers were 47%, value added resellers were 29%, OEMs were 23% and direct and other was 1%. Our three major indirect channels continue to be strong in this quarter.

Our revenue by technology: GPRS/GSM is at 28%, CDMA 66%, CDPD and other is 6%. Revenue that we have generated from new products that were introduced in the last 18 months for Q3 is 94%.

A geographical segment, the Americas, 78% in Q3, Europe, 15% and Asia-Pacific, 7%. Asia-Pacific was slow in this period whereas Europe was a little slower and the Americas were very strong. We expect product, channel, technology and geographic segment percentages to fluctuate quarter to quarter based on mix.

I'll turn to our balance sheet and compare it to June 30th of 2003. Cash and short-term investments increased by $1.4 million to $39.4 million from $38 million. This increase is due to cash generated primarily from operating earnings and working capital flows. Trade accounts DSO decreased to 39 days from 46 days, this is well below our target of 60 days. Our net inventory decreased to $2.9 million from $4.4 million.

I will now turn it over the Jason for business development.

Thank you, Peter. I will begin with a brief overview of the status of our acquisition of AirPrime.

On August 12, 2003, we completed our acquisition of AirPrime, a privately held supplier of high-speed CDMA wireless products located in Carlsbad, California. The results of AirPrime's operations have been included in our consolidated financial results since that date.

We also expect to be substantially complete with our integration activities by December 31st of this year. We believe that the combined entities, the new Sierra Wireless, if you will, is a well positioned market leader with a broad product line, innovative engineering, blue chip customers, global channels and a strong balance sheet.

Now, onto some business developments activities. In July, AirPrime, prior to the completion of the acquisition, had announced that HandSpring, an innovator in personal communication products, had selected the EM 3400 series as the CDMA wireless engine to power their recently announced Trio 600 product line. The Trio 600, by the way, has since been certified and launched by Sprint PCS. We also signed a distribution agreement with Cedron of Germany, a specialist in telecommunications, web and groupware solutions. Cedron will distribute our products in the German marketplace, including our AirCard 750 and new MP 750 GPS, both of which operate on GSM/GPRS networks, as you would expect.

We also announced the commercial availability of the MP 555 GPS rugged wireless modem for CDMA 1X networks. The MP 555 GPS is now the second product available in our next generation MP series, as we announced the commercial availability of the MP 750 GPS for GSM networks last quarter. We also announced the first North American implementation of the new MP 555 GPS with the Ontario Provincial Police in Canada.

OPP, as they are called, is deploying the MP 555 along with Panasonic custom computers into police cruisers giving OPP officers the ability to access Provincial and National databases. OPP is also using the new system to improve the efficiency of dispatch and arrest processes. Additionally, along with CompassCom, one of our automatic vehicle location application partners, we were selected by the City of Aurora in Colorado to migrate its public works department to the next generation wireless technology. CompassCom's suite of ADL products and our MP 750 GPS rugged modem have been implemented to help the city track, monitor and dispatch vehicles. Previously, the City of Aurora had used our MP 200 rugged modem with CDPD for the same application. So, this deployment makes Aurora a good example of customers migrating from 2g wireless networks and products to next generation wireless platforms and it is this migration cycle that is one of the key reasons for our development of the next generation MP series of products.

I will now comment briefly on our major supply agreements. As most of you know, we have supply agreements that feature minimum volume commitments from AT&T Wireless, Sprint PCS and Verizon Wireless. As previously shared with you, we expect to complete the minimum volume shipments on all three agreements during 2003. I am pleased to report on this call that during Q3, we received follow on orders from both AT&T Wireless and Verizon Wireless for quantities beyond their original minimum volume commitments. These additional orders are for Q4 shipments and were driven by accelerated end user adoption and strong sell through of our AirCard products.

Now, just a brief update on our demand picture. We expect our business in Asia to bounce back in Q4 from the Q3 results. We expect our business in Europe to be stable in Q4 and we expect our business in North America to once again, be very strong in Q4.

And now onto a couple of words on our VOq announcement. As most of you know, on October 8th, we announced the VOq line of professional phones and value added software for business users. Our new VOq branded professional phones will based on the Microsoft Windows Mobile Software Super Smart Phones. That's version 2003, by the way, in our first launch and VOq will feature both a familiar phone key pad interface and a unique flip open corded phone pad. VOq will also feature some unique value-added software that enables easy navigation of the devices' functions and information as well as providing a serverless e-mail experience for corporate enterprises. The first will ship, will support global markets by operating over the GSM/GPRS wireless and is expected to be commercially available in the first half of 2004.

I will now turn the call back over to Peter for an update on guidance.

Thanks, Jason. We first provided guidance for the fourth quarter ending December 31, 2003 on July 17, 2003. We are now increasing our fourth quarter guidance to reflect our current business indicators and expectations.

Inherent in this guidance is a continuation of the higher than normal risk resulting from uncertainty associated with the integration of AirPrime, the timing of volume shipments to channels and the rate of end customer adoption of new products. All these figures are estimates based on managed's current beliefs and assumptions and are subject to change. Our actual results could differ materially from those presented below.

So, our updated guidance in revenues is an increase to a range of 30 to $32 million. Our gross margin is increased to a range of 39% to 40%. Operating expenses are increased to 10.5 to $11.8 million. Restructuring is nil. Integration costs are increased to 1.4 to $1.6 million. Net earnings loss is unchanged at a loss of $0.2 million to $0.3 million or one penny per share. Our net earnings, excluding restructuring and integration costs, is increased from $1.0 million to $1.3 million being 5 cents to 6 cents per share and our cash flow is increased to be positive $1 million.

I will now turn it over to David.

Thank you, Peter. I would like to deal first with a management retirement. Dr. Norman Toms is retiring from his role as Chief Technical Officer and will be transitioning to an ongoing advisory role to the company. The change isn't happening yet, but we do expect the transition to happen and be completed by March of next year and that other members of the management team will assume Norman's responsibilities.

Now, just by way of background, Norman recently won the Cecil Green Award for Technology Entrepreneurship. awarded by the Science Council, to an individual that has started or developed a knowledge based company that has demonstrated ability to profitably create and sell world class products over time. Norman founded Sierra Wireless in May, 1993, was its first CEO and became the Chief Technical Officer in May, 1995, following my appointment as CEO. A couple of years ago, Norman deferred some earlier retirement plans he had in order to provide technical guidance to the development of the first VOq Professional Phone and Norman plans to stay with Sierra right through until that product is into commercial production.

He has played a key role in founding the company and building it and, frankly, the whole company wishes him very well in a well deserved, what he is calling, a semiretirement. We are also looking forward to Norman's continuing contributions as an advisor to the company.

Now, I would like to turn to a summary of Q3 and of the comments we have made looking forward. Starting with Q3, we had a very solid quarter. It was our 5th consecutive quarter of revenue growth, of operating profits and of positive cash flow. We closed the AirPrime combination in August and we commenced integration activities and consolidated reporting. Sales of our AirCard products and the embedded modules were strong and North American revenues were up quite significantly.

We received follow on orders from AT&T Wireless and Verizon Wireless and the operational and strategic developments in the quarter more than met our own expectations. Looking at Q4 and beyond Q4, our goals are to complete the AirPrime business integration, to bring our new VOq Professional Phone to market, and our focus, our business priorities, will continue to be the expansion of our distribution channels, a sell through to our end customers and continued investment for future growth. I would like to reaffirm that we will continue our business premise of profitable growth and note that we have increased our fourth quarter guidance in response to very strong demand for our AirCards and embedded modules.

With that, I would like to turn it over to you for your questions. Operator? Operator, we are ready to go ahead with questions.

Thank you. We will now begin the question and answer session. To ask a question, please make sure that you are not on a speaker phone. Press the number 1 on your touch tone phone. If you wish to remove yourself from the question queue, please press the pound sign. Andrew Lee, please go ahead with your question.

Good afternoon. With regards to the recovery, Peter, that you mentioned, is that excluded from the 6 cents adjusted earnings, was it $0.4 million?

The recovery, are you talking about Metrocom?

No, I thought I heard you mention, you were talking about a 1 percentage bump in your gross margin because of some recovery?

Yeah, we have a $400,000, it is not really a recovery, it's a sale of products that were previously written down that is included in our reported gross margin and improved our gross margin.

And what was the average margin on that $400 million in revenue?

Actually, it was only $400,000.

Oh, sorry.

I would have been very happy if it was $400 million. The gross margin.

It was a previously written down product so the gross margin is approximately 40% because we normalize gross margins on those recoveries.

Okay. Flipping to the R&D. Quite a big sequential bump up, I think around $1.7 million sequentially. Is that something that was planned because you don't provide the segmented guidance it seemed like a much bigger number than I was looking for.

Certainly we planned to start consolidating the operating expense associated with AirPrime and AirPrime's people are mostly concentrated in R&D. We did close the AirPrime transaction or combination earlier than planned. Our guidance was based, as you recall, on the combination closing September 1st, in fact, we closed on August 12th and started the consolidation on August 13th. So we had more time with the consolidation of AirPrime expense in the quarter than the guidance indicated.

That being said, the increase in R&D, on an overall basis, was certainly expected. We also had a reduction in research and development funding during the quarter which usually acts to offset some of our R&D expense.

Looking into the year Q4 guidance, is that funding still absent of your guidance?

Yeah, we have guided at a lower level of R&D funding then previously to reflect our current outlook for R&D funding.

Okay, and the last question I will ask then, on the visibility, should we interpret the lack of guidance for Q1 as a downward, I guess downward change in how far out you have visibility as a company, considering you provided two quarters the last quarter?

No, you should not. You should consider the fact in a we provided two quarters the last time around as an isolated event and we did that and indicated at the time that we were doing it specifically to give people visibility beyond the third quarter in which we would be reporting the AirPrime consolidation for only a fraction of a quarter.

So we gave Q4 guidance as well so people could see the effect for a full quarter. Our current demand indicators in North America for Q4 are very strong and you shouldn't interpret us returning to our pattern of providing a single quarter of guidance in any way negatively.

Thanks, guys.

Mike Walkley, please go ahead with your question.

Thanks, guys. I was wondering if you could give, maybe Jason or Peter could give a little color or your thoughts on channeling inventory by the different regions of the world with Europe and Asia being a little softer. Do you think there is any problems with products in the channels? Obviously, it seems like demand is really strong in North America. Jason, just touch on some color with your different carrier partners around the world?

Jason?

Sure, I will touch on that. Yeah, Mike, as you look at, I will start first just tops of the waves from a geographical standpoint. In North America, you are right, very strong sell through and inventories in the channels in North America are quite low and are flowing quite rapidly. In Europe, we have got one or two partners with more inventory than we'd like to see and others who are managing their inventory very effectively and in Asia, no issue right now with challenge inventories, our challenge in Asia, quite candidly has been some very aggressive price competition from both local players and others. We have also said that we expect Asia to bounce back a bit in Q4 and that's partially as a result of our ability to address that situation. But anyway, I hope that provides the color you were looking for.

Okay, great. Thanks. How does the EVDO product doing with Verizon last year, is that part of the follow on product for Verizon was for that product or was more the 1X products?

Well, no, the reorders were specific to the supply agreement we had with Verizon for the AirCard 555 which is our 1X product. So, the demand on the 1X product continues to be strong and. as you know, our card is a participant in the EVDO trials that Verizon has going on now in San Diego and DC. We haven't disclosed anything as it relates to additional EVDO orders.

Okay, great and Jason, I was wondering if you have gotten some general feedback on the VOq phone, how is that being received when you were just in Europe and now in Las Vegas?

Well, I didn't happen to be in Geneva last week but the team that was there was enthusiastic and our meetings here I think have been very positive. So, I think that the VOq is being very well received. We are very encouraged by what we have seen so far.

Great. Thanks very much.

John Butcher, please go ahead with your question.

John Bucher, Harris Nesbitt. Peter, could you provide the adjustments to the reported $941,000 loss that gets you to your $1.1 million adjusted number?

Yeah. That was the restructuring and integration costs of $2.2 million and the recovery from Metrocom of $0.2 million.

Okay, thank you. And then the question for you on distribution. It appears that Audiovox is distributing some PC cards, both 1X and EVDO cards that AirPrime had manufactured. Now that AirPrime is part of Sierra, do you envision similar such distribution arrangements as part of the company's future plans?

Jason?

We do, John. It is one of the key rationales for doing the business combination with AirPrime was that they covered a lower end price base, if you will, for private label PC cards that we didn't effectively address and we view that as beneficial to the overall product line. It means that we can go to a Verizon Wireless, as an example, and offer a full line of product covering both the low end and the high end AirCard branded products.

So, we are going to continue that same distribution model as part of our overall distribution mix still focusing a lot of effort on our branded AirCard products and keeping them at a premium tier, charging a premium price, capturing premium margins but also covering the lower end with private label product at a lower price.

Okay. Thank you very much.

You bet.

Howard Lis, please go ahead with your question.

Yes, good afternoon. I apologize for the background noise. It is pretty noisy in here with the show. Question on the restructuring. Are there any other additional restructuring charges related to AirPrime anticipated in the next fiscal year and, as well, are there any cash related restructuring payments that have been deferred until next year?

No, Howard. The restructuring charges have all been accounted for as of the date of acquisition completed as of September 30th. They have to be in that respect. In terms of integration costs, the integration costs, as we have said, will be substantially complete by December 31st in terms of either accruals or the cash paid out and that has been factored into the results for this quarter and our guidance for the next quarter.

Okay and with respect to the VOq phone, the commercial availability, prior to this call you talked about first offering being around first half of next year. Now, it looks like it is going to be March of next year is that correct?

That is not correct, we continue to expect the VOq product to be commercially available during the first half. There was no change to that date.

Okay and when do you expect the corporate e-mail capability to be demonstratable?

It is demonstratable today to the clients that we are working with, clients and carriers that we are working with. However, we are not yet publicly demonstrating it. I would expect that to happen by the first quarter.

Just one final question on the VOq line. Maybe you can characterize some of the early discussions you have been having with your existing carriers about what they are saying and how they feel about how it will be received in the market?

Jason?

I will take that. I think conversations with our existing carrier partners, GSM carrier partners specifically have been going along well. They view the VOq as a product that hits the spot that's not currently occupied by anybody. They like the fact that VOq is a phone first in form factor, so it is familiar to both them and their sales teams as well as end users, and it is a device that they believe and we believe also by the way that end users will carry with them all the time. What we have seen is a number of users tend to -- who are both PDA users and phone users tend to leave their PDA in the office or leave it at home but they always carry their mobile phone with them. So, that's really ringing quite strongly with carriers. They like the fact that it is a phone first but also combines the messages and e-mail capability.

They also like the fact that it doesn't have a, you know, a bit of an albatross if you will to the sales process of having to sell a traditional dedicated e-mail server. They, like we, believe that's going to be eliminating a barrier to selling high end phones with e-mail messaging capability.

Thank you very much.

Spencer Churchill, please go ahead with your question.

Good evening, gentlemen. I was wondering if we could talk about the upside in the margins, if you will. Could you talk about, or could you give us a little more color on the mix issue. Are you finding more product cost reductions?

Spencer, we are hearing you quite faintly but we will try and answer that question. We understood it to be on gross margin during Q4 and what underlies our raising our guidance on Q4 gross margin levels and essentially, we have continued our product cost reduction activities and they are bearing good fruit and we are also expecting a mild shift in product mix during the quarter and the effect of those two things taken together is to move our gross margin up to the 39 to 40% range that we have indicated.

Okay. Is this better by the way?

That's much better.

Okay. Great. I guess I will delve in. How would you say you see the margins shifting as we go into 2004 with the introduction of the VOq?

We are expecting gross margins to be relatively stable at the level they have been at the last few quarters and at the level we are guiding at. We expect the VOq product to be a strong contributor to gross margins. It will, of course, be comprised of sales of both hardware and of software. Those will be at different gross margin levels but overall, VOq should be a strong contributor to gross margins once we bring it onstream.

One final question, if I may, just something we haven't talked about in a while. I guess on the MP line it was quite a jump from the last quarter and getting back to levels we saw last year. With the conversion going on from CDP to IX and VPRS, do you see that revenue line kind of ramping again to the 2, 3, maybe $4 million that we saw in previous years?

I think we do see, we definitely see growth in the MP line and it is not only growth in revenue terms which is how we segment this but it is of course a very strong gross margin contributor to our portfolio. Now, we expect that growth to be there.

Now, exactly how much growth or revenue we get from that product line in any given quarter is really going to be a function of the pace of migration from older 2g networks to the newer next gen networks. We think that process is just now getting underway. We launched and started getting revenue contribution from the new MP 750. We launched that product during the second quarter, it had a partial quarter of contribution in Q2 and a full quarter in Q3. We launched the CDMA MP 555 in Q3 where it had a partial quarter of revenue contribution and it will move to a full quarter of revenue contribution in Q4. So, there should be good growth trend there.

Great. Thanks very much.

Gus Papageorgiou, please go ahead with your question.

Great. Thanks. I know you are not giving guidance until the next quarter but thinking of the next year, should we expect seasonality to play a role on a quarterly basis or are we so early in the adoption of these modems that seasonality won't be as big a factor?

Historically and by that I don't mean a quarter or two ago but over a long span of years in the industry we have observed there are some seasonality effects but frankly, in recent quarters the macrotrends in our business have been much bigger and more powerful than any seasonality effect and given the pace at which we have been introducing new products and therefore new revenue opportunities, as well as new distribution channels and new geographies and our plans to start shipping the VOq product during the first half, we are not expecting there to be a significant seasonality effect in our business.

Great. Thank you very much.

Deepak Chopra, please go ahead with your question.

Good evening, guys.

Hello.

Do you hear me?

Yes, we do.

A couple of questions here. In terms of growth, did the organic or core business exclude any AirPrime quarter over quarter?

Jason?

Yes, it did.

Okay and in terms of last quarter you gave us some color saying that sell through was bigger than sell on. Are you willing to give us that type of color this quarter in terms of the overall business?

I think we would be willing to say sell through, and we have already said it, sell through was very strong during the quarter. Notably strong in North America and we were also able to receive orders from some major North American carriers, new orders for product beyond their agreed volume commitments and the effect of those two things was to make our new bookings performance quite positive and has caused us to raise our guidance for Q4 based on the resulting demand.

Okay. Is it fair to take it that then there is going to be a little bit of channel building just as carriers prepare big marketing launches going into the new year then? Is that a fair assessment?

I don't think that's an effect on our current product portfolio. In fact, the carriers are already going into their busiest time of the year now. With our existing products and barring the possible exception of the MP that we just released, these products are already in the channels and selling and selling through and so I don't think you are going to see a channel loading effect in the new year.

Okay. Fair enough.

At some point, I think it would be fair to say at some point when the carriers are getting ready for VOq launches, they will have to secure a sufficient supply of the product to prime their channels and launch but I don't think that's an effect you should be looking for immediately.

And it is not a concern for the company right now?

No.

Okay, you talked a little bit about competition in Asia-Pacific region. I was wondering if you could talk about, are you starting to see any of that here in North America and Europe and maybe who are the players you are seeing creating the competition out in Asia-Pacific? Thank you.

Jason?

I would like to believe we don't have any competitors in North America but that wouldn't be true. I will characterize competition in Asia as a combination of local Chinese players, primarily, as well as a combination of European and North American brands like ourselves, Novatel, Option, Sony Ericsson. Kind of the usual suspects, if you will, in addition to the local Chinese players. The competition is a little thinner, frankly ,on the CDMA side and we are starting to see our CDMA sales in Asia begin to build.

Competition in North America. It is, you know, it is more of the same. The same people that we compete with in GSM that we compete against in Europe include Option, Sony Ericsson, to a lesser degree, Novatel and those competitors are constant in both North America and in Europe. In CDMA in North America we feel like we have got quite a strong competitive position.

But more of the pressure has been placed in Asia-Pacific so far at this point?

Yeah, well, in terms of number of competitors and intense focus on price, yes.

Okay, and maybe one last question maybe for Peter. Can you give us a bit more granularity in terms of the guidance in terms of R&D and SG&A split and the increase you are expecting to see on both sides there?

Deepak, we have never provided that so it would not be appropriate to do it at this point.

Fair enough. Thank you, guys.

Thanks.

Glen Tracey please go ahead with your question.

Thanks very much. Peter, a couple of questions first on operating expense. First the Metrocom recovery. Would that be a credit to administration charges in the quarter?

Yes, it was, yeah.

Okay. And is it correct that there would be then negligible R&D credits during the quarter as well?

That is correct, yes.

And that would be an assumption going forward, or a reasonable assumption going forward as well?

In terms of our guidance for Q4, that's all we have given any information on, Glen and that is a reasonable assumption.

Okay. As far as the costs related to the restructuring and integration appears significantly lower than what your initial guidance was, I am just wondering is that as a result of you keeping more staff than you originally expected to?

In part, it is, yes.

Okay and just a quick question on the adjusted number. Can you tell us the number of diluted shares used for the calculation of the diluted adjusted earnings?

Yes, for the quarter it is 18 million 409.

That was diluted for the adjusted?

I beg your pardon. Yes, it would be the same number of shares, yes.

No, because you went positive, right on the adjusted number?

Right.

So didn't you have some adjustments to the basic shares outstanding to get the diluted adjusted number, which is positive?

It is a very, it is technically a good question. It is a very small amount, is the answer.

I see. Thanks very much. To products. Yesterday you had an announcement about the AirCard 580. I am just wondering, is that effectively a Sierra branded AirPrime 5220?

It is -- I am sorry?

I was just going to take that, Jason, and tell Glen that only your hairdresser will ever know.

I will take that as a yes but it look like you are basically adding in the Sierra Watcher software and so on.

Again, we are executing the product strategy, a tiered product strategy exactly as Jason laid out which means we will have products positioned at different price points with different levels of support and software and other value adds either stripped out or bundled in.

So then the 5220 will continue to exist, I guess, is what I am taking from that?

You are probably right but I think it is a question I want to be clear on the answer on. The integrating the two companies together means that we will consolidate hardware platforms and we will have and we will keep multiple different products or SKUs positioned for different price points and different value propositions. So, on any given hardware platform you can try and make tasks or assumptions on what platform will be underlying a new product but our game plan is to converge these hardware platforms, have less unique platforms and more products packaged out of those hardware platforms.

I guess where my question is coming from, probably as long as a year and a half ago saw sort of demo versions of I guess what was being called at that time an AirCard 575 dual antenna system from Sierra for the CDV 1X CDVO and that was a true type two form factor with just the antenna that was extending and the 580 appears to be, you know, have the larger extension single broad antenna. So, I guess, I am kind of curious if you can talk at all about plans for any other Sierra products in that range, in that 1X EVDO range that may be even a higher performance than what has been announced so far.

Well, it is only yesterday that we announced the AirCard 580 with speeds up to 2.4 mega bits and I am definitely not going to announce any products today that have even more performance than what we just announced yesterday. We have clearly indicated that CDMA is a core platform for us and that we intend to have a product line that goes all the way from IS/95A through 1X and now to EDVO and we will have that product line in multiple form factors and multiple product price points. I mean, I think you are on the right track with your understanding of things and you should expect us to do exactly what we have described.

One final question. Just with regard to the trio 600 and the supply of the EM 3400 series modules. Can you give some kind of idea as to what you are seeing in terms of demand from HandSpring? This was, I mean, Q3, I assume, would be the first quarter where you were delivering through AirPrime volume for initial production of the trio 600 and are you seeing sort of consistent volume orders coming from HandSpring looking out for some time frame or are you expecting some sort of bump at the beginning and then settling down?

Well, it is correct that Q3 was the first quarter that AirPrime and now Sierra shipped that module to that customer, HandSpring and so we got the benefit of a partial quarter of shipments and revenue during Q3 and in terms of looking forward on orders, I am going to turn that over to Jason.

Yeah, it is, I am not going to comment at any level of specificity but we are currently shipping, as you know, to HandSpring and they are currently selling the product to Sprint. It has been announced that Sprint has launched the product. HandSpring, as I am sure you wouldn't be surprised to learn is working on other deals as well and we won't know what the forward looking demand is for the trio 600 until such time that HandSpring tells us they have gotten reorders from Sprint or new orders from a different channel.

I will say that everybody who has seen the trio 600 is excited by it and it has gotten great reviews but it is too early to tell how it is going to do in the marketplace.

Okay, thanks very much. Appreciate you answering the questions.

Chris Umiastowski, please go ahead with your question.

Hi, thanks very much, got a few questions here for you guys. First of all, just wanted to clarify the gross margin question that was asked earlier. You had $400,000 of product sales of 2g that you had said you wrote down and the margins on those were about 40%. I am trying to understand if I understand that correctly first of all and second of all, if so, how does that contribute positively to gross margins?

Chris, we are just going to take a moment to get our working papers in front of us because that's the second question on the same thing.

Okay. So we just pulled our work papers. Just to summarize, Peter reported at the outset of the call in the summary level financial results that we had $400,000 in recoveries from previously written down 2g inventories and the net effect of those recoveries was a 1% improvement to our gross margins and on a $26.2 million quarter that means the net effect was approximately $250,000.

Okay, got you. Thanks very much. Hopefully, we can leave that one to rest now. The second question, just on the VOq. Maybe this is for Jason. I know you probably can't comment on just specific names and I know that you don't have complete control over the carrier launches, obviously, because they go through their own approval processes, certification processes. Can you give me an idea of your level of confidence that, in the first half of 2004, you will have at least one major carrier in North America and one major carrier in Europe who has finished the certification process and started shipping?

My confidence is high.

Okay, I will leave it at that then. The next question is on the mix shift. There was an earlier question and, I can't remember who commented, but you were saying that your gross margins the increase in guidance on gross margins for next quarter was partially the cost reduction but also a mix shift. You didn't say which direction the mix shift is going to force margins. My assumption is you are going to have more OEM module shipments because of a full quarter of AirPrime and that would be a downward force on margin. Can you just confirm that I am understanding this right?

Yeah, I think we previously commented on that. That was me providing the comment, Chris. We are seeing offsetting effects. That is, cost reduction driving a gross margin improvement in the quarter and an offsetting and partial mix downwards on gross margin coming out of increased sales of lower margin products.

Okay.

So, the cost reduction is the more powerful of the two changes and is resulting in us raising our guidance.

Okay. Perfect. That's what I wanted to make sure of. Obviously your cost reduction efforts are going along quite well.

We are pleased with them. We have made some significant progress in changing our business model and supply chain earlier in the year. We reported on that in July with the move of a significant amount of our production to Flextronics and the adoption of a new business model with Flex and we got a good benefit out that during the third quarter and we are expecting additional traction on that during the fourth quarter.

Okay, perfect. Getting down to the end of my list here. Are there any carriers who in either the U.S. or in Asia are reporting, sorry not Asia, are there any carriers just in general having problems with being sold out of AirCards?

Yes. We do have some demand-driven issues and we expect to address those during the fourth quarter and that will, of course, represent part of our fourth quarter revenue.

Okay, perfect and then the last one is with respect to EVDO. You know, I think it is interesting to see carriers like Verizon launching EVDO in the San Diego market and maintaining that same $80 price per month, yet providing much much higher speeds, I know it is just one city and I think, Jason, you commented that DC they are rolling that as well. Any kind of just conceptual commentary you can make on what the opportunity is in '04 as carriers roll this out and whether you think it is going to start to be a material contribution, EVDO card shipments?

Jason?

Well, even with just the two markets launched, Chris, we are pretty enthusiastic about our EVDO sales prospects, it is contemplated to add to our sales forecast moving forward, so it is part of our guidance and we believe it is going to continue to be strong. I think the real key question is just how fast carriers like Verizon expand the number of markets that they have got the EVDO service in.

Do you have any sense on how that is going?

Well, you know, I can't, you are a good digger, you can probably get a better answer directly from Verizon on that but clearly, I think they view EVDO as a competitive differentiator. So, you can let that comment lead you where you may but Verizon is best to provide you information on what their deployment plans are beyond San Diego and DC.

All right, thanks very much, guys.

You bet.

Tim Luke, please go ahead with your question.

Thank you. Just sort of building on that for Europe you would expect to be up sequentially in the calendar fourth quarter, right?

You know, we have actually guided that we expect Europe to be stable during the fourth quarter.

Okay and why wouldn't it be up, given the seasonality and what you were saying about the stock position demand?

Right. Well, the stock position varies from region to region and Jason touched briefly in answer to an earlier question that in Europe that we have got some carriers in a need product situation and we have got other carriers who have built a bit of inventory in their channels and so there is a mix. And we are, the art of calling the mix of the quarter is just that. It is a bit of an art. So our outlook is that MEO will be stable. It could come in different than that but that's what we have built our guidance on.

In terms of going forward and distributing and going on market on the MP, is it likely you are to be finding deals with systems integrators or other channel partners as well as establishing relationships with the carriers?

Well, that's certainly the model that we have used to build our position in the business in government and enterprise markets with our current products and it is our goal to take VOq as a new product category through our existing distribution channels to our existing target end customer markets. So we are looking to carriers to be a significant distribution channel for the VOq Professional Phone line but we would also expect other forms of channels who target business and enterprise markets to be active there as well.

Do you have orders currently placed for the platform?

Do you mean on our supply chain or on us by --

From carrier customers in anticipation of the launch?

We are not in a position to talk about carrier orders or other channel commitments at this point in time. It is our plan to provide an update on those things when we get to, closer to market.

Okay. Just one last thing, just with Peter. The time line for the announcement of a new CFO and how that process is developing?

Well we announced Peter's plans to retire in July, we announced the plans in July. His plan is to retire next January after our next 2003 and the integration of the AirPrime business. At the time we made that announcement last July we also engaged Corn Ferry to undertake that search. We gave them a wide geographic mandate on it and we are currently in the interviewing process and would expect to announce Peter's successor well in advance of him wrapping things up in February.

Great. Thanks.

Andrew Lee, please go ahead with your question.

A couple follow ons. Could you qualitatively talk about how the book to bill was maybe versus last quarter?

Book to bill improved over last quarter which was a pretty good quarter and it is one of the leading key indicators that we looked at internally in establishing Q4 guidance.

Do you want to touch a number to that, whether it is above or below one?

It was, you are inviting me to do that, I don't really want to do that, but it was very, it was very good and it was approximately 1.

Okay. On the guidance for Q4, is your Q4 organic revenue organic in the sense of excluding AirPrime, up from Q3?

You know, we haven't been breaking down old Sierra versus old AirPrime inside the company and so we are, we didn't report on it that way and we are not planning to report on it that way in the future. We do provide what I believe is an industry-leading amount of segmentation to the financial community. We segment by product, we segment by technology, we segment by channel and we segment by geography and we are all segmented out and we are not planning to segment old AirPrime and old Sierra as a fifth segment.

Sprint PCS volume contract. Expectations to complete that this quarter?

Yeah, that's our current expectation, yes.

Okay, and lastly on the Q4 guidance what is the diluted share count assumption that you are using in that number?

Just over 20 million.

Great. Thanks, guys.

Glen Tracey, please go ahead with your question.

Just a quick question with regard to Korea. When you purchased AirPrime, one of the values that they brought is an established relationship with KT Freetell. I am just wondering if you can comment on any further developments in that relationship or the fact that you have that relationship now and the opportunities that might be giving you within Korea?

Jason?

I will comment on it briefly. As we have stated earlier, prior to our acquisition of AirPrime, AirPrime had a relationship with KT Freetell and as part of that relationship the AirPrime shipped to KT Freetell single band CDMA 1X EVDO pc card products. That relationship still exists and we are looking to see what we can do in terms of using that relationship as a leverage point to increase our business in Korea and elsewhere in Asia.

And does that relationship help you at all or have you seen any advantage of having that with regard to discussions with any of the other Korean carriers?

Wherever you have a presence in a certain region you are going to get some benefit of being there and having a business track record there, for sure.

But nothing that's, you know, significant at this point?

Yeah. Certainly, nothing to disclose at this point.

Thanks very much.

If there are any further questions, please press 1 now. There are no further questions in the queue.

That's great, operator. Thank you very much.

You are welcome.

Thank you to everyone that has been on the call. As is our custom, we will have management available to handle any follow-up calls at the company's headquarters, 604-231-1100. Thanks again.