司亞樂 (SWIR) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for holding for the Sierra Wireless first-quarter results conference call. I would now like to introduce your speaker, Mr. David Sutcliffe.

Thank you, operator. I am David Sutcliffe, the Chair and CEO of Sierra Wireless, and with me at the Company's offices I have Dave McLennan, the Chief Financial Officer, and Jason Cohenour, Senior Vice President of Worldwide Sales.

By way of introduction, we're going to run through an agenda today pretty standard for our calls. We will have Dave McLennan take the forward-looking statements and financial performance. Jason will provide an update on business highlights and on our product pipeline. Dave McLennan will cover financial guidance for the second quarter, and then I will summarize, and as a team we will take your questions. And with that, I would like to turn it over to Dave.

Thanks, David, and hello, everyone. For the record, 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-user demand conditions, revenues, gross margins, operating expenses, profit, 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 product which we do not produce today and that meet defined specifications. They also depend on bringing the Voq Professional Phone to 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.

With that, I would like to move to the financial results. Our results are reported in U.S. dollars and in accordance with U.S. GAAP. For the three months ended March 31, 2004, our revenue was $41.6 million; operating expenses were $11.6 million; our net earnings were $4.6 million; and our diluted earnings per share were 18 cents.

Our results relative to the Company guidance provided on January 28, 2004, and updated for certain measures on April 1, 2004, are as follows. Fourth-quarter revenue was $41.6 million, consistent with our revised guidance of greater than $40 million. Gross margin was 40.3 percent, better than our guidance range of approximately 39 to 40 percent. Operating expenses were 11.6 million, better than our guidance range of 12.8 to 13.2 million. Net earnings were $4.6 million, better than our revised guidance of greater than $3 million. And cash flow from operations was positive $5.3 million, consistent with our guidance of significantly positive cash flow.

During the first quarter, we signed a second agreement with Technology Partnerships Canada, or TPC, under which we are eligible to receive conditional, repayable research and development funding up to $9.5 million Canadian. The agreement is effective for development work relating to third-generation wireless technologies commencing April, 2003. Funding of $1.4 million was recognized as a reduction of R&D expense in the first quarter of 2004, of which $1.1 million relates to the period in 2003. We also received an additional recovery from Metricom of $0.2 million in the first quarter of 2004, and our results include a foreign exchange loss of approximately $0.3 million.

Looking at Q1 2004 compared sequentially to Q4 2003, revenue increased to $41.6 million from $34.6 million, an increase of 20 percent. Revenue increased due to an increase in the demand of our PC card products and CDMA-embedded modules. Gross margin percentage decreased slightly to 40.3 percent from 41.1 percent, due primarily to product mix. Operating expenses were $11.6 million in Q1 '04 compared to $13 million in Q4 2003. Operating expenses, excluding $1.1 million of TPC funding related to 2003 and the Metricom recovery, were $12.9 million in Q1 2004, compared to $12.1 million in Q4 2003, excluding integration costs. Our operating expenses increased as a result of market development and new product costs associated with the Voq Professional Phone and the AirCard 775 for EDGE networks.

Net earnings were 4.6 million in Q1 2004, compared to net earnings of $1.9 million in Q4 2003. Net earnings in Q1 '04, excluding the TPC funding related to 2003 and the Metricom recovery, were $3.3 million, or diluted earnings per share of 13 cents, compared to net earnings in Q4 2003, excluding integration costs, of $2.8 million, or diluted earnings per share of 12 cents.

Looking at Q1 2004 compared to Q1 2003 year-over-year, revenue increased to $41.6 million from $20.1 million, an increase of 107 percent. Revenue increased due to an increase in demand for our PC card products and CDMA-embedded modules, including products formerly sold by AirPrime. Gross margin percentage increased to 40.3 percent from 39.4 percent. The increase is due to increased volume and product cost reductions achieved as a result of our manufacturing relationships with Flextronics.

Operating expenses were $11.6 million in Q1 2004, compared to $7.6 million in Q1 of 2003. Operating expenses, including TPC funding related to 2003 and the Metricom recovery, were $12.9 million in Q1 2004, compared to $7.6 million in Q1 2003. Our operating expenses increased compared to Q1 '03 due primarily to the acquisition of AirPrime, which was completed in August of 2003, and costs related to the development of new products, including the AirCard 775 for EDGE and the Voq Professional Phone.

Net earnings were $4.6 million in Q1 '04, compared to net earnings of $0.4 million in Q1 '03. Net earnings in Q1 '04, excluding TPC funding related to 2003 and the Metricom recovery, were $3.3 million, or diluted earnings per share of 13 cents, compared to net earnings in Q1 '03 of $0.4 million, or diluted earnings per share of two cents.

Moving to the balance sheet, compared to December 31, 2003, our cash, short-term and long-term investments increased by $5.6 million to $115.3 million from $109.7 million. This increase in cash was primarily generated from operating earnings and working capital flows. Trade accounts receivable DSO increased to 38 days from 36 days, well below our target of 60 days. Net inventory increased to $2.1 million from $1.5 million. I would now like to pass the call over to Jason for some business highlights.

Thank you, Dave. I'm going to start first with progress on products for CDMA networks and channels. First, we commenced U.S. commercial shipments of the MP 555. You may recall that we had shipments into Canada in Q4 of '03. The MP is a rugged in-vehicle mobile solution for CDMA 1x. During the quarter, shipments of the MP 555 were made to two CDMA carriers in the U.S. We also publicly announced that the MP 555 has been certified by Sprint for operation on the enhanced Sprint Nationwide PCS Network. The MP 555 is targeted for use by police, fire, rescue, and field service organizations, markets where we already enjoy a very strong market leadership position.

We also added the AirCard 555R to our product line for the China market and commenced initial shipments. The AirCard 555R adds RUIM capability, which stands for removable user identity module, essentially a SIM card for CDMA, adds that capability to our existing AirCard 555. RUIM support is a requirement for the China Unicom network. We also announced that the AirCard 555R will be distributed by Beijing Putian Taili in China, and after the Q, we also announced additional AirCard 555R distribution capability in China with NCL, an existing distribution partner of ours.

In general, we saw exceptional strength in sales in and sell-through for our CDMA product line. Revenue and end-user demand were particularly strong in North America and spanned our entire CDMA productline, including CDMA-embedded modules, CDMA 1x PC cards, and CDMA EvDO PC cards.

Moving to GSM, we announced the commercial availability of the Sierra Wireless AirCard 750 for GPRS for O2 customers in the United Kingdom, and we commenced shipments against that agreement. Qualitatively, we also saw surprising strength in our AirCard 750 sales and sell-through, particularly in North America. We also introduced the AirCard 775, a quad-band PC card for EDGE networks, and demonstrated early AirCard 775 samples at the CTIA Show in March. Like our AirCard 750, the AirCard 775 is based on platform technology from Analog Devices and TTPCom, and we're confident that this partnership enables us to reduce development risk and ensure fast time to market for this product. Demand for the AirCard 775 is building nicely in North America, Europe, and Asia, and we are on track to launch the AirCard 775 in Q3 of this year.

We also introduced a second EDGE product during the quarter, the MP 775 rugged in-vehicle solution. Like the AirCard 775, the MP is also expected to be launched in the second half of this year. Along with our introduction of the MP 775, we announced the availability of an upgrade program for our existing MP 750 customers as well.

In the UMTS space, we announced our selection of QUALCOMM's MSM 6250 chipset and systems software for our multi-mode generation wireless products. Using the MSM 6250 chipset platform, we will develop a line of UMTS product variance and bring these products to market in Europe and North America in the first half of '05.

Moving on to the Voq, we exhibited the new Voq Professional Phone at 3DSM in Cannes, CTIA in Atlanta, and CBIT in Hanover. We also received very favorable commentary regarding Voq from industry analysts and the media in both Europe and North America. If you're interested, you can see some of this commentary on our website, on the Voq website, www.voq.com, under news and events. End-user and operator testing of the Voq is progressing well, and we are on track to launch Voq during this quarter in both Europe and North America. Our distribution strategy for Voq continues to be to launch and promote Voq with leading operators and VARs (ph) in North America and Europe.

Along those lines, during Q1, we announced an agreement with KPN Mobile to launch and sell the Voq Professional Phone and the VoqMail Professional Edition products to customers in the Netherlands. We also announced agreements with several European distributors to sell the Voq Professional Phone and VoqMail Professional Edition to customers in Austria, Belgium, Germany, Holland, Italy, Luxembourg, the Nordics, Switzerland, and Spain.

Moving on to financial performance by -- segmented financial performance, I will start by product segment. Revenues by product segment were as follows. MP was 6 percent, versus 6 percent in Q4 of '03. PC cards were 49 percent, versus 59 percent in Q4 of '03. Embedded modules were 43 percent, versus 32 percent in Q4. And other was 2 percent versus 3 percent in Q4.

Revenues by distribution channels were as follows. Carriers, 33 percent, versus 42 percent in Q4. Resellers, 23 percent, versus 25 percent in Q4. OEMs, 44 percent, versus 33 percent in Q4. And direct and other was zero percent, as it was in Q4. So our three major indirect channels continued to be very strong in Q1.

Moving to revenues by technology. GSM, 22 percent versus 27 percent in Q4. CDMA, 77 percent versus 69 percent in Q4. And CDPD and other, 1 percent versus 4 percent in Q4. In total, revenue from new products -- and these are products that were introduced in the past 24 months -- represented 98 percent of our revenue in Q1.

Moving to revenue by geographical segment. Americas, 91 percent versus 89 percent in Q4. Europe, 5 percent versus 5 percent in Q4. And Asia-Pac, 4 percent versus 6 percent in Q4. So the Americas continue to be quite strong for us. We expect product, channel, technology and geographic segment percentages to fluctuate quarter-to-quarter based on mix and new product introductions.

I'm going to provide now a brief update on demand trends. We expect revenue growth in all three geographical regions in Q2, as product growth will be driven by strong demand for currently shipping products, as well as new product introductions, including Voq. Demand for our PC card, embedded module, and MP products continues to be strong. Q1 was a record sell-through quarter for the Company, and we are expecting further sell-through growth in Q2.

In Q1, our book-to-bill ratio was once again greater than 1, giving us strong visibility on Q2 revenue overall. We saw strong demand growth in Q1 for our EvDO PC cards and are expecting further growth for these products in Q2, particularly in the U.S. We continue to be on track for initial commercial shipments in Q2 of our Voq Professional Phone in both Europe and North America. We also continue to be on track to launch our AirCard 775 for EDGE in Q3. We are very encouraged by the high degree of interest shown by North America and European carriers in the AirCard 775. I will also mention that demand has increased industrywide, and consequently, component lead-times are lengthening. I will now pass the presentation back to Dave for Q2 guidance.

Thanks, Jason. With respect to guidance, we are providing guidance for the second quarter, ending June 30, 2004, which reflects our current business indicators and expectations. Inherent in this guidance are risk factors that are described in detail in our regulatory filings. All figures are estimates based on management's current beliefs and assumptions, and are subject to change. Our actual results could differ materially from those presented.

For Q2 2004, we expect revenues to be up significantly to a range of 48 to $50 million. We see a consistent gross margin of 39 to 40 percent, an increase in operating expenses in line with our business model to a range of 14.3 to $14.8 million. And we expect net earnings up significantly to a range of $4 million to $4.3 million, or 15 to 16 cents per share. Finally, cash flow from operations to continue to be positive

With that, I would like to pass the call over to David for a summary.

Thank you very much, Dave and Jason. I would like to summarize starting with Q1 before I go on to Q2 and forward quarters. On Q1, we achieved our seventh consecutive quarter of revenue growth, operating profits, and positive cash flow. Shipments of PC cards and embedded modules had strong growth, and North American revenues were exceptionally strong during the quarter. We are experiencing some supply constraints due to lengthening component lead-times.

We began commercially shipping the AirCard 580 for CDMA EvDO -- that's our second EvDO product; the AirCard 555R for CDMA networks in Asia and the MP 555 for 1x networks; and also in the first quarter, we announced our first carrier and our first group of resellers in Europe for the Voq Professional Phone.

Looking at Q2 and the future, our demand is presently very strong. Bookings are up and visibility for Q2 is very good. We are guiding for strong sequential quarterly growth, and our revenue guidance for Q2 is not heavily reliant on new product introductions. We are on track to bring our new Voq Professional Phone to market during the quarter. And looking past Q2, we expect to introduce additional new products for both the EvDO and EDGE network platforms, which we see expanding in North America, and with EDGE, in international markets.

On an overall basis, our priorities continue to be an expansion of our distribution channels, sell-through of products to end customers, and continued investment to drive future growth. With positive cash flow and a strong balance sheet, we feel we are well-positioned to capitalize on those opportunities for future growth. And with that, operator, we would like to take any questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Mike Walkley of RBC Capital Markets.

Thank you. Maybe you could start with a little more color on the Voq Phone. You're saying it is still on track to ship this quarter. Would that also indicate the U.S. carrier you've talked about? Maybe you can just give us a sense of potentially the type of units that are included in your guidance.

Mike, this is Jason. We have not included any guidance on specific product categories. We have mentioned qualitatively we expect to launch the Voq in both regions, and we have also mentioned that our Q2 guidance is not heavily reliant on new product introductions -- that does include Voq. So overall, our view is that Voq revenue in the quarter will be, to give you a qualitative statement, modest.

Great, that does help. So we would expect more ramp as the year progresses -- with the current customers announced? And maybe you can update us, Jason, on new number of customers you are in trials with for the Voq on the operator side.

On the operator side, we have approximately six operators actively testing Voq. And I think we'd mentioned earlier we have over 20 end-user corporate customers currently testing Voq.

Okay, great. That's helpful. Maybe, Jason, just going to your PC card business, it looks it was basically flat sequentially. Based on the EvDO upcoming launch of Verizon, would this be one of the businesses driving increased guidance for next quarter, or is that more your embedded module business? Maybe you could give us visibility on the two different businesses there.

Maybe my math is different, Mike. I think we had exceptional growth in our PC card business in the quarter, and that was certainly focused more on CDMA than in GSM. Our outlook for Q2 is for continued growth in both PC cards and embedded modules.

Okay, I will check my math real quick off the percent mix of the different units. Maybe a quick question for Dave here on the financial side. In terms of your tax rate, it was a little higher than expected this quarter. How should we think about tax rate for Q2 in your guidance and maybe what a longer-term tax rate into back half of '04 and '05, just to help us in longer-term modeling?

Sure, Mike. The effective rate in Q1 was approximately 13 percent. And I think pushing forward into Q2, if you use a number closer to 15 percent, that would be a good target. Beyond that, I'm quite uncomfortable giving a range beyond our guidance range.

Okay. So maybe we could talk more about the later. I'm a little confusing on we should use longer-term -- if we should go to a higher 20 tax rate that we have talked about potentially in the past.

Maybe just let me expand that a bit. For the balance of the year, I think if you are in the mid-teens, that would be a good representative number.

Okay, that's what I was trying to get at. Thanks. And maybe just one last question and I will pass it on. Just in terms of your OpEx, it was in line where we thought it would be in terms of your guidance. How should we think of that ramping as you are launching more carriers for the Voq and other products? Should we think of -- maybe if you could give us a longer-term plan where we think the OpEx could be entering '05 or more of a steady-state for you in absolute dollar terms?

I will speak to our long-term business model, which is what we are working towards. And just for the record, I will recite it here on the call. Gross margins in the 40 to 42 point range; sales and marketing component of OpEx at 12 to 14 percent; R&D at 10 percent; G&A at 5 to 6 percent. That means OpEx in our target model totals 27 to 30 percent. Our pretax target for our long-term model is 12.5 to 13 percent. And our net after-tax long-term model is 10 percent. Now those are not models to apply to the current quarter or the next quarter; that's our long-term targets.

And then to your question about OpEx, a couple people asked us this morning if we had anything specific driving increase in OpEx. And I think the overall observation we want to make sure we share is that OpEx is on a significant downward trend relative to revenue, and that we are managing it into that long-term business model. And for little bit of substance behind that, in Q4, our OpEx was 34 percent of our revenues. In Q1, it was 31 percent of our revenues. And with the guidance we have provided this morning and using the midpoints in the guidance figures that are ranged, OpEx would be 29.5 percent, and for the first time in recent memory, would fall into the business model long-term range for OpEx of 27 to 30 percent.

Now, to the more specific question you asked, Mike, what is going to happen as Voq rolls out into carrier channels and reseller channels in various markets around the world. The answer to that is we expect our OpEx to be managed according to both the guidance we've given and to the business model we described, and we feel that the marketing expenses associated with Voq in those markets are fundable within the figures we have provided you and within that business model in future quarters.

Okay, thanks. I will pass it on and good luck with the upcoming Voq launch.

Andrew Lee of TD Newcrest.

Just starting with the revenue by technology, it looks like the GPRS was down a little bit sequentially. Is that a reflection of competition or did you see a little bit of softening in terms of the addressable market in the quarter?

Andrew, this is Jason. I will comment on that. And I want to clarify an answer that I gave to Mike previously as well, while doing so.

PC card revenue was roughly flat quarter-over-quarter. Mike's observation was correct. However, PC card revenue for CDMA technologies grew, and we gave ground in PC card sales for GSM. The main reason for the slowdown there is, as you would expect, Andrew, I mean, there's a technology overhang in both North America, with EDGE, and in Europe with UMTS. So we would naturally expect to see GPRS sales specifically tend to trend down in favor of the newer technologies.

Does that encourage you to accelerate your UMTS? You talked about the first half of next year -- is it possible for you to get into the market this year?

I think, Andrew, we are not planning to indicate any changes to market introduction timing. The products that address GPRS transition for us are the EDGE product family, which we will start introducing next quarter -- that is third-quarter, and the UMTS product family, which as Jason indicated, we're going to start introducing in the first half of '05. And I don't think we want to suggest that we're going to change those timeframes at this point.

Are you seeing any opportunities on the embedded side for either your GPRS or EDGE. I know you haven't put out a product yet, but embedded in the sense of smart phones or handhelds?

There are certainly opportunities in the embedded space as we progress to technologies beyond GPRS.

Okay. Can you say whether you're using your own modem in the Voq Phone or not?

In the Voq phone that is operating on GPRS, which we're going to market with now, we are using third party components and intellectual property, which is fairly similar to what we do in some of our other product lines. And we are working with module suppliers. In Voq products for network technologies like EDGE and UMTS, we may take a difference architectural approach.

Okay, and last question. As you get closer to the launch of the Voq, any more feedback from the carriers? How would you size the addressable market, maybe taking a stab at units of possible, and whether this addressable market overlaps with the Treo600 devices that are out there? I am just trying to see how the segmentation is coming out from feedback from your customers.

We're going to duck that question. We do have internal market analysis and third party market analysis that we are using in our business planning, but we don't want to be in the business of providing market research on the category. So at this stage, we're certainly not going to try and speak to the addressable market in quantitative terms.

You did ask about overlap in addressable markets between Voq and products like the Treo600. I will note that the Treo is based on the Palm operating system, while Voq is on the Microsoft smart phone platform. To some extent, there's a natural segmentation in target markets there; probably to a lesser extent there is some overlap. Voq is targeted very much at the high-end enterprise and government customer in a very IT-intensive environment.

Great, thanks a lot.

Clarence Rebeiro of Octagon Capital

I was just wondering -- perhaps you don't normally disclose this, but can you talk a little bit more about the carriers that you are currently approaching with Voq, and if you can speak to the minimum requirements in terms of pipeline orders?

I will take that question. The initial launch of Voq, as I think everybody knows, GSM GPRS, so it stands to reason that we're targeting leading GSM GPRS carriers, primarily in Europe and in North America, and we're just not going to mention them by name at this point in time. So you can put a number of leading carriers on that list yourselves. And in terms of -- I think you asked about unit projections -- we are not prepared to provide any guidance on unit projections for Voq either at this point in time. Was there a third question?

No. That was it. Thank you.

Jeff Kvaal of Lehman Brothers.

Thank you very much. Dave, I think my first question will be for you on the OpEx side. Could you talk about what were the factors that led OpEx to be less than what you anticipated in this quarter?

Sure, Jeff. I think we continue to invest in the business from an R&D perspective and also a product launch perspective. I think we did push some sales and marketing costs from Q1 that you will see materialize in Q2, but that was not a big number.

I would add to that if you look at the adjusted analysis, we had expense relief, OpEx expense relief, both from TPC and from Metricom. In the news release we provide an adjusted figure for you, and OpEx on an adjusted basis was $12.9 million, which is in our guidance range of 12.8 to $13.2 million.

Okay, sounds good. Secondly, could you talk about the magnitude of the China opportunity or how we should think about your opportunities in China in CDMA?

I will take that. This is Jason. I will speak qualitatively to that. You know Unicom is the number two player in China. I don't know what their market share last quarter was, but it's something on the order of 20 percent behind China Mobile. We have seen some pretty good momentum so far with our GSM GPRS products through our distribution networks and through China Mobile operators, and we're very encouraged right now by what we see for CDMA 1x as well. And we're very encouraged by the positioning that China Unicom is taking and their participation in the launch of the AirCard 555R, in bringing it through their regional (indiscernible) to end-users. So qualitatively, we're bullish, and that is why we are forecasting growth out of Asia-Pacific in Q2 and in subsequent quarters.

So you see as fair amount of marketing support from them?

We do, yes.

Great. And then finally, just to clarify, you had said that the new MSM chipset that you were working with would allow you to introduce a UMTS card in the first half of 2005. Is that the first UMTS card you're going to have available -- just to clarify?

First, we didn't specify, Jeff, the form factor. We said product variance for UMTS. So our first focus is to develop a platform, or an engine, if you will. And we want to stay nimble on what product variant we do first. And product variance, you can guess what they may be. They may be PC cards. They may be embedded modules. It might be a Voq. So we're staying nimble on that, and we expect the first product variant will be launched in the first half of 2005.

Okay, wonderful. Thanks very much.

Spencer Churchill of CIBC World Markets.

Just wanted to speak a little bit more about the regional splits. Asia looked to be down a little bit sequentially, and you were speaking last quarter about expected rebound there. Maybe you could just talk a bit about that.

Sure, Spencer. We did expect a bit of a rebound in Asia-Pacific. We were disappointed that it didn't occur. I am pretty confident, though, it is just -- what we are seeing out of Asia-Pac is a bit of a timing issue, timing as it relates to expected orders in GPRS, as well as timing as it relates to volume shipments of CDMA 1x. We did commence shipments of the AirCard 555R, but that happened very late in the quarter. So we did not have full momentum underway for 1x in China as we anticipated we would.

So it is less of a competitive issue as we were talking in earlier quarters?

Yes, the competitive environment is always intense in Asia, but we have not seen that get any more intense than it has been in previous quarters.

Okay. And in Europe, the revenues were up sequentially, but you were speaking about giving up share in GSM PC cards. So I was just wondering where the strength was there, if you are having a bit of a falloff in the GSM PC card line.

Actually, in Europe, we were expecting Europe to be sort of flat, and as you have indicated, it was up sequentially. And that was all, of course, GSM GPRS PC cards. Our view there is that we are not losing share within that product category; rather, it is the technology platform of GSM GPRS that is losing share to new technology deployments like UMTS.

Okay. And maybe if we could speak a bit about the R&D funding. You did, I guess, 0.3 for the current quarter. Could you give any color on what your expectations are in the guidance for Q2 and perhaps going forward for the rest of the year?

Spencer, it's Dave. If you look at what happened in Q1 with respect to the 300,000 amount from TPC, that is pretty representative of a go-forward number.

Okay, great, thanks. And I guess I am going to try and drill down a little bit more on the Voq assumptions. I know that you mentioned it's not heavily reliant and it will be modest. Could we maybe say it's less than 5 percent of total revenues or --?

We will let you say that.

Okay, perfect. And just on the OpEx again, I was just wondering if maybe you could give a sense of how much of the expense in Q2 is a one-time nature relating to the launch of these products that perhaps won't be occurring in the future, and how much of that is ongoing R&D and SG&A OpEx charges relating to these products?

It's David, and as I said in my earlier comments, the OpEx, if you look at it in absolute dollars, I could try and answer that. But if you look at it in percentage terms, we are guiding OpEx down another 1.5 percent of revenue in Q2, after dropping it 3 percent of revenue sequentially from Q4 to Q1. So if I can rephrase your question, how much of the 29.5 percent of revenue that OpEx is guided at for Q2 is ongoing? The answer is our long-term business model is to have OpEx in a range of 27 to 30 percent. And so you can think of that kind of percentage range as our ongoing future OpEx model.

Spencer Churchill Okay, and one last question -- just maybe some more qualitative color on the guidance. You mentioned you expect growth in all segments. Is there any one segment -- aside from technology-wise, CDMA versus GSM -- but just specifically OEM versus AirCard versus mobile, is there one segment that you see growing a little bit faster than any of the others? Obviously, in Q1 OEM was very strong. Do you expect that to continue?

I do expect OEM to continue to be a strong segment. We spent years investing in building up our portfolio of OEM clients and our portfolio of OEM products, and we are doing quite well in that area right now. But I don't think we should let strength in OEM detract from a very strong picture on the Company's PC card product portfolio. That has been strong. We expect it to be notably strong in Q2 and for the balance of the year. It is an area where we've got some very good products, some very good partners, and some very good end customer demand that is visible to us.

Great. Thanks very much.

John Bucher of Harris Nesbitt.

A question for you on components. Last quarter, you indicated that it was a mild constraint with respect to your ability to ship. And I'm just wondering whether it was more than a mild constraint in the first quarter. And then your thoughts on the second quarter on a comparison bases, whether you think it's going to be to tougher still than the first, if in fact it was tougher. I have a follow-up.

In Q1, was a mild constraint, again consistent with the previous quarter. In Q2, we think it will be a little tougher and our guidance figures reflect that.

Okay, thank you. The next question is regarding customer concentration. I was wondering if the percentage of revenues accounted for by your top three customers, did that percentage go up or down in the first quarter compared to the fourth quarter?

Hang on a moment. We are just getting the figures in front of me for that. Hang on. Okay, customer concentration in Q1, we had one customer greater than 20 percent of revenue, and our top five customers represented 65 percent of our revenue. I don't have the Q4 numbers in front of me, but off of the top of my head, we have a slightly greater customer concentration in Q1 than we did in Q4.

Thank you very much, David.

Chris Umiastowski of Orion Securities.

Strong quarter; good job. I just want to ask a few questions. I really want to focus on the OEM side of the business for my questions. First of all, just on the OEM side, can you tell me if in that segment you have any customers that represent 50 percent of your OEM sales?

No, I can't, because then we would be getting into segmented reporting by customer, by product segment and so on. I will reiterate on customer concentration, we have one customer greater than 20 percent, and the top five in total are 65 percent. And OEM customers, our top OEM customers are in those top customers that we have just reported on.

Are there any other plus-10-percent customers, without naming names?

No.

Fair enough. On the pricing for OEM modules, have there been any changes with respect to market pricing for your modules, or can you give us, without naming dollar amounts that you sell the devices for, is there kind of a percentage range that you are offering discounts for volume on at all? What is going on with pricing in the OEM side?

Chris, this is Jason. Volume-based pricing for embedded modules is the norm, and as volume goes up with any individual customers, they expect and we offer some price reductions over time and over volume. I do not think -- I don't want you to be led to believe, though, that pricing pressure on OEM is any more intense than it has been in the past. That is just a consistent theme. And I will also comment qualitatively that our gross margins in our embedded modules business is quite good and not being squeezed down.

It has held up well, so I'm -- that's why I was trying to see if there is any indication at all that you're expecting any more pressure to happen over time or not. It sounds like you are confident, at least for the near-term. Last question, just on competition, obviously in the GSM module space, GPRS module space, you never decided to get into that business because of economic reasons. It made sense. It seems like it was the right decision. Do you think there's any major risk of that happening over the next while in the CDMA side? I'm just noticing guys like HTC in Taiwan are now starting to put CDMA EvDO radio right on board on their newest pocket PC product. Is that something that you're concerned about?

Yes, it's David. Yes to add to Jason's answer on that last question, for clarity, I think you should understand that as volume goes up in the OEM business, gross margin that comes from our pricing agreements will tend to mix down. When you have high volumes, you tend to get lower ASP and lower gross margin. So that is a trend only within individual customers who achieve volume.

And to your second question or to your more recent question, we did not enter the GPRS module space specifically because we did not see the right opportunity to be differentiated. In the CDMA space in embedded modules we saw a number of opportunities for significant differentiation. Those have proven to be real, and we have won quite a number of OEM opportunities in the CDMA space, both with existing OEMs and more recent new OEMs. We expect that to continue to be a healthy business for the foreseeable future.

There are alternatives to our modules in CDMA, other people who make modules and people like HTC, who do design solutions. And that has been a constant feature of our OEM business since the very first day we got into it some years ago. And of course over the years, many people have suggested that because it is possible to take chipsets and reference designs and assemble them into a product, that that would mean that there really is not a long-term, sustainable value proposition for OEM modules. And frankly, that scenario where we could not disagree more from the outsider's perspective.

We see the major differentiators in OEM modules -- and this is certainly true in CDMA and maybe true in other technologies as well -- the major differentiators for a company wanting to take a product to market and needing wireless are a reduction in time to market; a reduction in development cost; a reduction in risk; a reduction in regulatory and carrier and interoperability approvals, complexity, and cost; and a competency concentration that allows us to leverage our knowledge and our volume across multiple customers to the benefit of each of the customers that we sell modules to.

So while it is a common idea that the presence of these other ways to do things is a threat, in practice, the customers self-select. And people that have lots of development money and lots of time to work with and who are willing to accept large amounts of risk and undertake a lot of work in the wireless specialized areas, they will tend to go to ODMs, design houses or internal solutions. Customers that trying to optimize for time to market, cost, risk, and the other factors I described will tend to work with module providers, and I expect that to continue to be true for the foreseeable future.

Okay, thanks very much.

Glen Tracey of Pacific International Securities.

Just a quick question on KPN. You have announced them as a carrier for the Voq. I'm just wondering if you've started any shipments to KPN.

As we have indicated, Glen, we are planning to commence initial commercial shipment this quarter, Q2. The answer to your question is no, we have not commenced shipment to any customers.

Thank you. With regard to the resellers that you have announced in Europe for Voq, do you expect to be able to announce the carriers that will be carrying that product or supporting that product as well during the quarter, given that you've already announced resellers?

Yes, we do.

Okay. And on the OEM side of things, can you give us an idea of what you are quoting to customers on your most in-demand OEM modules right now in terms of lead-time?

In terms of lead-time?

You're talking about on your Voq -- for your products, for instance, that there are some supply constraints, component lead-times are extending and so on, and I am just -- you are also a supplier to other companies in your OEM module space, and I'm just wondering generally what are you quoting to customers right now? If somebody came to you and wanted to buy a large supply of CDMA modules, say for Ev or 1x, what would you typically be quoting as a lead-time?

Well, if it is a currently shipping product, normally we like to get at least 90 days orders in advance, and that's highly dependent on volume. We have a whole list of OEM partners who buy in relatively modest volume. We are able to fill those orders more quickly. If you're looking at significant volume from customers such as palmOne, we like to have orders at least 90 days in advance. Candidly, our lead-time picture does fluctuate month-to-month, week-to-week based on our own supply chain picture. And we are in constant communication with those customers on any changes in lead-time as a result of those changes in our own supply chain picture. So to give you a rough estimate, it's 90ish days, but that's highly contingent on volume, the current situation with our own supply chain, and other factors.

But you generally haven't felt a need to extend that beyond the 90-day timeframe at this point?

Generally, no. But from time to time, we have.

On the Voq, given that it is a new product, are there any significant single-source components on that product?

There are on a product like Voq a number of single-source components, although those components, if I'm understanding your question, they do not tend to be the components that end up being long lead-time.

Okay. So do you have any concerns about single-source components on the Voq as far as your ability to introduce -- launch or initiate shipment of the product stream this quarter?

No.

Are there any efforts that you would take in regard to the single-source components that are on Voq to end up second sourcing them?

Where it is technically and economically feasible and rational to do that, we always do that, so when you get to a finished product, you have the minimum number of single-source components that you could rationally design the product around. And then it goes from being a development criteria of minimizing the number of single-source components you use to a production criteria of ensuring you have the supply of those minimum number of single-source components.

Okay. With regard to other variances of Voq, is the Voq currently designed so that it could accept any of your existing modules -- for instance, your CDMA modules?

It is currently designed so that we could introduce other RF solutions into the same product platform.

So without significant additional redesign on the physical internal physicals of the product?

That, of course, is a bit of a relative question -- what is significant. But when you change the radio platform inside of a device, that can range from a small job to a very big job. And again, the Voq product is designed so that we could introduce different radio solutions. It does not mean there will be no work involved in doing that.

No, of course not. There's always some work. But I'm thinking in terms of when you would schedule a project, for instance, would it be a significant part of a new project or would it be relatively small compared to going through for instance carrier approvals and such on the product?

Frankly I think you should look at it both ways, because the Voq product that you can see right now is just our first Voq product and we would expect to introduce additional products in the Voq category in the future. And so when we are thinking about solutions for Voq on any particular radio or air link, we have a choice of either taking a current Voq product and putting a new wireless module or solution into it or building support for that new air link into a future version of Voq that is on the road map.

And which way we go on each decision we have to make is going to depend on a couple different variables: when do we think that air link is commercially ready? Timing assessment, for example, of one of the right time for a Voq for UMTS. Another example might be an air link that is already ready to go. We just have to evaluate the availability of good channels, good partners, and a good end-customer base that we can target, and that might suggest a substitution within an existing Voq platform.

Great. Given that the Voq is a new product line for you, have you -- I guess from the perspective of evaluating the actual uptake of the product and success of the product, are you planning the product or the product family introduction to have a relatively extended period of time for the first product to be out there and to see with the uptake is like before you introduce new products? Or have you got a plan where you are saying every six months we need to be introducing a new product in the Voq family to address the market that you see right now?

I think I would characterize what we're doing as more to the latter scenario. We are committed to the category. We believe in the target market and the demand that we see and that we have in our business case. We have a family approach to the product, and we are executing on that. And what is visible and going to market now is the first product in that category.

Is it reasonable for us to assume that you might have a second product before the end of the year?

Here we are, we are working very hard to get the first product into the market and to answer everyone's questions on which carriers and which countries and which resellers. And I think we're going to stay focused -- in terms of what we're talking about publicly, we're going to stay very focused in getting the first product into channels and sold through to end customers for the course of this year. You should understand, as we've said, we have a family approach and a category approach to this product line, and in research and development, we are actively working on things that would follow our first product. And I'm not going to try and go into any detail, including the timing of those things, yet. It's just too premature.

I appreciate that. Just one last quick question. With regard to your guidance for Q2, it is fairly substantial revenue increase over what you achieved in Q1, which obviously was a huge increase as well. Can you give an idea as to where you see the majority of the strength? Obviously, OEM was the key part in Q1. Do you see something similar in Q2 or do you see it being more balanced between PC card and OEM?

I tried to comment a moment ago, and I think that OEM will continue to be quite strong, but I don't think that we at all underestimate the demand on the PC card area. We have very strong market and product position there and we would expect PC cards to be a very big contributor in Q2.

Great. Thanks very much for your time.

(OPERATOR INSTRUCTIONS)

Operator, maybe we can just interject here, looking at the time, that we have time for two more questions.

Elias Mousa (ph) of Archer (ph) Capital Partners.

I had a couple of questions. You mentioned that GSM was down a little bit sequentially, but Europe was up. What would account for Europe being up kind of in line with the rest of the business but GSM being down?

We sell GSM products in two other regional markets, North America and the Asia-Pacific region, and Jason did note in his comments that the Asia-Pacific region was down by a couple percentage points of overall revenue mix over the previous quarter.

Understood, okay. And on the OEM portion of your business, can you expand a little bit on average selling prices there? Are they dramatically different than the AirCard side of the business? And if so, what is the trend on the average selling prices, both on the AirCard and the OEM side? What are the distinctions between the two?

Well, to the first part of the question, ASPs in the OEM product portfolio are significantly lower than ASPs in the AirCard or PC card product portfolio. The PC card or AirCards are, of course, end-user products. They come with not only the hardware and the software that you would be familiar with, but also with services, warranties and other things associated with a complete end-user product. In the OEM area, we're making modules that have very specific deliverables and are not sold through to end customers -- not by us anyway. And so ASPs are lower in the OEM space --

Are they roughly in the tenth or so of the ASPs of the AirCard space or even lower?

They certainly wouldn't be 1/10. The PC card average selling prices range in the $250 to $300 range for branded cards, and perhaps a bit lower than that for private-labeled PC cards. In the OEM arena, we have average selling prices ranging as low as $100 a unit and as high as $200 a unit. And as Jason commented earlier, that is heavily dependent on customer volume.

Got it. And where do the OEM -- what is the trend on the OEM pricing side and where does it need to get to by the end of the year to sustain demand at these levels?

OEM pricing at a product portfolio level, I would consider to be stable. And within that, we have volume pricing agreements with each of our OEM customers. So they don't have a single price point, but they have a price range that is tied to volume. And as they succeed at selling their products and increase their volumes, they go down our price scale. So our ASP, our nominal volume ASPs are stable. And over time, as individual OEMs increase their unit volumes, you should expect that our OEM ASPs we achieve will blend downward with volume.

And one unrelated question, on the CDMA AirCard side of the house, I guess if EvDO ramps, what do you expect the substitution to look like between 1x and EvDO over this year? In other words, is there a pretty sharp ramp down on the 1x side as there is a sharp ramp up on the EvDO side, or will the 1x side be a little bit more flat for a while?

This is Jason. We certainly in our business have modeled a fairly high growth in the EvDO category, and definitely we are forecasting some cannibalization, particularly within specific carriers, such EvDO carriers, cannibalization of the 1x cards. So in the fullness of time, without giving you any specific percentages of business or growth or erosion, certainly EvDO we see growing as a product category, in part at the expense of CDMA 1x. That is an overall statement.

If you look at sales of CDMA 1x geographically, we see growth for CDMA 1x for us in Asia-Pacific, as an example, particularly with the introduction of the AirCard 555R. But in markets where there is EvDO, we clearly see a shrinking 1x business and a growing EvDO business.

And as far as your own mix is concerned on the CDMA AirCard side, have you indicated what the DO portion of the mix roughly looks like at this point and what it might get to in the future?

We have not disclosed that.

Is the DO portion material on the AirCard side right now, or is it still pretty small -- without necessarily naming or giving the exact amounts.

Well, the DO portion of our CDMA PC card sales today is already significant; we commented on that last quarter as well. The DO product is also 1x capable, so some customers are choosing to buy DO cards and use them as 1x cards, even in markets where DO is not yet available.

Great. Okay, thank you.

Can we take one more question before we wrap up?

Ray Sharma of GMP Securities.

First of all, congratulations on an excellent quarter. I have just one question for you, and it relates to -- I think Flextronics came up during our discussion earlier here today. And this is for David Sutcliffe, by the way. What do you think about the GTran purchase by Flextronics, the implications that it might have on your business?

Well, I believe that that happened quite long time ago, although it may just have become visible to some people more recently. And I don't expect it to have any implications on our business.

Okay, short and sweet. Thank you.

Thank you. I will return the presentation to you to conclude.

Thanks very much. Thank you to everyone who has participated in the call. And as a reminder, management is available, should you have any follow-up questions, at the company's offices at 604-231-1100. Thank you again.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again and have a great afternoon.