司亞樂 (SWIR) 2004 Q2 法說會逐字稿

Thank you for holding for this Sierra Wireless' second quarter results conference call. I'd like to introduce your speakers Dave McLennan and David Sutcliffe.

Thank you operator. It's David Sutcliffe. I'm the Chair and CEO of Sierra Wireless. I have with me CFO Dave McLennan and the Senior VP of Worldwide Sales and Distribution Jason Cohenour. This is our conference for our second quarter results for quarter ending June 30 2004. And I'm going to turn it over to David to do the forward-looking statement disclaimer and Q2 financial performance. Jason with then take us through business highlights, a product update and back to Dave McLennan for financial guidance. I'll then summarize and we'll go to the usual question and answer period at the end of the call. With that let's go ahead David.

Thanks, David and good afternoon everyone. Regarding our forward-looking statements: 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 related to among other things is statemetns about future market conditison, supply conditions, channel and end customer demand conditions, revenues, gross margins, operating expenses and our expectations, intentions and plans that are not historical facts. Our expectation regarding future revenues and earnings depend in part upon our ability to develop, manufacture, supply and market products. Which we do not produce today and meet define specifications. In light of the many risks and uncertaintines surrounding the wireless datat communicatons market we cannot assure that the forward-looking statements discussed will be realized.

Onto our financial results. Our results reported in U.S. dollars and are in accordance with U.S. GAAP. For the second quarter of 2004 revenue was $51.6 million. Operating expenses were 13.5 million, net earnings were 6 million, and diluted earnings per-share were 23 cents. Our results relative to Company provided an April 19th, 2004 are as follows: Second quarter revenue was 51.6 million better than our guidance range of $48 to $50 million. Gross margin was 40.5%, higher than our guidance range of approimately 39% to 40%. Operating expenses were 13.5 million better than our guidance range of 14.3 to 14.8 million.

These expenses were lower than expected as a result timing of expenses related to the Voq launch and engineering spending. Net earnings were 6 million, better than our guidance range of 4 to 4.3 million. And cash flow from operations was 8.2 million consistent with our guidance of positive cash flow. During the second quarter of 2004, we received an additional recovery from Metricom of $150,000. And our results also include a foreign exchange loss of approximately $300,000.

Comparing our results sequentially, Q2 2004 to the prior quarter Q1 2004, revenue increased to 5.6 million from 41.6 million, an increase of 24%. This increase is primarily due to an increase in demand in North America for our PC card and Mobile products.

Gross margin percentage remained stable at 40.5% compared to 40.3% has strong PC card and mobile product margins offset the impact of lower margin OEM products. Operating expenses were 13.5 million in Q2, 2004 compared to 11.6 million in Q1, 2004. Operating expenses in Q2, 04 13.6 million if you exclude the Metricom recovery compared to 12.9 million in Q1 04 if you exclude a 1.1 million of TPC funding related to 2003 and Metricom recovery in that quarter as well.

Our operating expenses increased as a result of increased revenue Market Development and new product costs associated with the Voq Professional phone and the AirCard 775 for EDGE Networks. I'd like to point out that our operating leverage has improved sequentially over the last 3 quarters. Operating expenses as a percentage of revenue were 26% in Q2, 2004 that's down from 31% of revenue in Q1 and further down from 35% in Q4 of last year. Net earnings were $6 million or diluted earnings per share of 23 cents in Q2, 04, compared to net earnings of 4.6 million or diluted earnigs per share of 18 cents in Q1, 2004. Net earnings in Q2 were 5.9 million or diluted EPS of 22 cents excluding the Metricom recovery. Compared to net earnings in Q1 of 3.3 million or diluted EPS of 13% excluding the TPC funding related 2003 and again the Metricom recovery.

Revenue, comparing the Q2, 2004 to Q2 2003 on a year over year basis revenue increase to 51.6 million from 20.7 million an increase of 149%. Revenue increased primarily due to an increase in demand in North America for our PC card or products CDMA embedded modules and mobile products inclduing products formally sold by AirPrime. Gross margin percentage increased to 40.5% from 40.2%. Operating expenses were 13.5 million in Q2, 2004 compared to 7.5 million in Q2 of 2003.

Our operating expenses increased compared to a year ago due primarily to increase revenue, the acquisition of AirPrime which was completed in August of last year and costs related to the development of new products including the AirCard 775 per EDGE and the Voq Professional phone. Net earnings for 6 million or diluted earnings per share of 23 cents in Q2 04 compared to net earnings of 0.9 million or diluted earnings per share of 5 cents in Q2, 2003.

Net earnings of excluding the Metricom recoveries in both quarters were 5.9 million or diluted earnings per share of 22 cents in Q2 04, compared to net earnings of a .6 million or diluted earnings per share of 4 cents in the prior year. Moving on to the balance sheet of. Comparing to March 31, 2004, our cash position increased by 6.5 million to 128 - -121.8 million, that's up from 115 million, 115.3 million at March 31. This increase was the primarily generated from operating earnings and working capital flows. Accounts receivable day sales outstading increased slightly to 40 days from 38 days and is well below our target of 60 days. And finally, net inventory increased slightly to 2.9 million from 2.1 million. I'd now like to pass it over to Jason Cohenour Sierra Wireless' Senior VP of Worldwide Sales for some business highlights

Thanks Dave and good afternoon everyone. I'm going to start on business development progress in our CDMA Business. We received new orders from Audiovox Communications additional supply of our PC 5220 ED-VO PC cards. The new orders total approximately 29 million with deliveries scheduled to begin in the third of quarter of 2004 and extending into the fourth quarter of 2004.

Also, together with Spring we announces the commercial availability of the PC3300 CDMA 1X PC card. The PC 3300 joins a Sprint 1X PC card line-up which already features the Sierra Wireless' AirCard 550. With 2 1X cards now in the Sprint line-up we have caputured significant momentum with Sprint PCS. Sprint also of recently disclosed its plans to deploy ED-VO at its next-generation high-speed data platform.

We view this as a positive development for us. And we believe we are well-positioned to benefit from Sprint's deployment. We also announced that VeriPhone a worldwide leader in electronic payment solutions selected the Sierra Wireless EM3420 1X embedded module to wirelessly enable the companies on the family of wireless point of sale terminals. This design win marks our initial entry into the payment terminal space. A market experiencing strong growth with an install base of over 37 million terminals worldwide.

Alaska Communications Systems announced the introduction of its wireless broadband access. A broadband wireless Internet service based on EV-DO and it utilizes the Sierra Wireless AirCard 580 as the access device for this service. In GSM we announced our first distribution agreement in India with the Adino Telecom a broadband solutions company.

Adino will be selling the Sierra Wireless AirCard 750, NP 705 and ultimately our new AirCard 775 for EDGE networks to customers and carriers in India. Moving on to Voq business development activities. During the quarter, we commenced commercial shipments of the Voq Professional phone to channel partners in Europe including KPN and Holland. Early in July and we also announced with KPN the commercial availability of Voq in the Dutch market.

KPN is offering the Voq for 99 Euros with the service agreement. In Asia, for we extended our existing distribution agreement with Network Electronics of Singapore to sell and distribute the Voq Professional phone in Singapore. The Voq has also received regulatory approval in Singapore. And we expect Voq to be commercially available in Singapore some time during the third quarter.

Also shortly after quarter end, we announced Voq distribution agreements with the BrightPoint and CellStar for the North American market. At the same time we announced wetwork for the vote on the AT&T wireless GSM network. Voq is expected to be commercially available in the U.S. early in the third quarter.

Moving to segmented financial performance and starting with revenues by product segments, the product revenue mix was as follows: MPs represented 10% of our revenue in Q2 versus 6% of our revenue in Q1. Our MP revenues grew 100% quarter over quarter. DC cards represented 55% of our revenue in Q2 versus 49% of our revenue in Q1.

Revenue from PC cards grew almost 40% quarter over quarter. OEM represented 32% in Q2 versus 43% in Q1. OEM revenue was down 8% quarter over quarter. Voq represented 1% of revenue in Q2 and revenue from other products was constant at 2%. In summary revenue from PC cards and OEM was quite strong this quarter.

Going forward, PC cards and a Voq as a percentage of our revenue mix to trend up and for OEM as a percentage of revenue mix to trend down. Moving to revenues by distribution channel: carriers represented 27% of our sales. Resellers represented 41%, OEMs 32%, and Direct 0. Moving to revenues by technology. Our revenues from our GSM products represented 9% sales in the quarter.

Revenue from CDMA products represented 90% of sales in the quarter and revenues from CDPD and Other represented 1%. A revenue from new products introduced in the past 24 months was 71% of our revenue in the third quarter. Moving to revenue by geographical segment: revenue from the Americas was 94%, revenue from Europe was 3%, revenue from Asia Pacific was 3%. The Americas were very strong once again in Q2. Europe was weak as a result of not have a UMTS PC card in our lineup yet. Asia was weaker than expected as a result of new product shipments occurring late in quarter and weak GPRS demand.

I'll now comment on some demand trends in the business. We expect revenue growth in all 3 geographical regions in Q3. This growth will be driven by demand for currently shipping products as well as new products including Voq and the AirCard 775 for EDGE. Demand for our PC card, embedded modules and MP products continues to be strong. Q2 was a record sell through for the Company - - pardon me a record sell through quarter for the company. And we're expecting further sell through growth in Q3.

New orders in Q2 were exceptionally strong. Giving us a strong visibility on Q3 revenue overall. Demand in Q2 for our ED-OP PC cards remains strong. Particularly in the U.S. and we're expecting this trend to continue in Q3. We continue to be on track to launch our AirCard 775 for EDGE in Q3. And we're encouraged by the high degree of interest we're seeing from North American and European carriers in the product. Demand for our embedded modules continues to be strong across a diversified and growing OEM customer base. And during Q2 we made significant progress in expanding our supply chain capacity to meet growing demand. We still expect however to be effected by long component lead times on occasion as a result of growth in overall industry demand. I'm now going to pass the presentation back to Dave for Q3 guidance.

Thanks, Jason We are providing guidance for the third quarter ending September 2004 which reflects our current business indicators and expectations. Inherant in this guidance are risk factors that are describe in detail in our regulatory filings. Our actual results could differ materially from those of the below. And all figures are estimates based on management's current beliefs and assumptions and are subject to change.

So for Q3 2004 we are providing revenue guidance of approximately $57 million representing a 10.5% growth over Q2. We expect gross margin to be stable in the 39% to 40% range. Operating expenses will grow and in line with our business model metrics to approximately $14.8 million. I should highlight that that represents only 26% of revenues and and is better than our long term business model target. And we also expect net earnings of approximately 6.4 million or 24 cents per share. And finally cash flow continuing to be positive. I've like now to pass it back to David for some summary comments.

Thank you, Jason and Dave. In terms of Q2, 2004, I think we have a great first quarter and we followed it by an even better second quarter. It's our eighth consecutive quarter of revenue growth operating profits and positive cash flow. We're already achieving our target long-term model for profitability about a year earlier than we expected. Shipments of PCs cards and mobile products had strong growth and North American revenues were exceptionally strong during the quarter. We began commercially shipping the Voq Professional phone in Europe at the end of the second quarter. Now, looking at Q3 and the future beyond Q3, at this point in time our demand is very strong.

Bookings are up sharply and visability for Q3 good. We're guiding for strong sequential quarterly revenue growth. We're on track to bring our new AirCard 775 for EDGE networks to market this quarter. We also expect over the next couple of quarters to introduce products for new and expanding and EV-DO and EDGE network opportunities. On Voq we'll expand distribution and sell through. And already in this third quarter we've announced initial North American channels and network approval with AT&T Wireless. During Q3 more channels and work on end customer rollouts will continue. And we'll also be investing in further new Voq product development.

Our priorities across all major product lines continue to be expansion of our distribution channels, sell through to end customers and a continued investment for future growth. With positive cash flow and a strong balance sheet, we're well-positioned to capitalize on opportunities for future growth and we'll continue to focus on growth that's profitable. With that, I'd like to turn it over to our callers for their questions. Operator?

Thank you, ladies and gentlemen. If you have a question please press 0-1 on your touch-tone keypad. If you're calling from a speaker phone and if possible pickup your hand set before pressing 0-1. If you wish to the question queu please press the pound sign. When I announce your name please ask your question. Our first question is from Michael Walkley from Piper Jeffrey. go ahead with your question please.

First question is for David McLennan. Dave, could you just touch - - just a housekeeping question here on the tax is a little higher than expected. And I think based on your guidance it's going up to 25%. Is that the rate we should use going forward?

That's correct Mike. I think in last call we directionally indicated that we'd be in the the mid to high teens. The tax rate in this quarter is approximately 18%. And we do suggest that would trend to a 2005 number of approximately 25%

Okay. So just use that rate going forward?

Yes

Great thanks. Jason, maybe you can give as little early feedback on the Voq. Maybe a little more color on the testing process and we are with other customers potentially and just any early indications on feedback on KPN sales on that 99 Euro price point?

Sure, Michael. I'll share with you what I can. We - -late in the quarter command shipments into European channels including KPN. So not only KPN. We also at the top of this quarter commenced a little more aggressive shipment of seed units as they became available to other operators in Europe and customers in the U.S. as well.

We just launched VOQ with KPN so candidly it's a bit early to tell what the customer uptake is. And in the U.S. we've just established channels as we recently announced with BrightStart and CellStart. And expect to commence commercial shipments early this quarter. So again there it's still a little bit early to tell on customer uptake. We remain positive. We believed that we designed ourselves into a very high growth space.

We believe we've brought to market now a highly differentiated product for that space. And you know the ultimate success of this particular Voq oproduct is going to play out over the next several quarters. So I wouldn't expect instant information on customer uptake. That's going to take a little while to play out. But I will emphasize that this marks our first entry and we are fully committed to the Smartphone category strategically.

Okay great. And Jason maybe to follow up on some of your breakout. For next quarter you said 0EM module business would follow as a percent of sales. Should we expect it to be down in absolute terms? While the other businesses are growing to offset that fall?

Well we're not guiding for specific revenue totals,Mike. But we are giving you some directional guidance on product mix. And I would expect that percentage of revenue for OEM modulesto trend down and PC cards and Voq to trend up

Okay that's fair. And then mayby just 1 last question and then I'll pass it off. Can you give us just color maybe on your EDGE and then WCDMA products? With your Class 12 EDGE device and the Quadband can you kind of let us know the customer interest in that product? And maybe timing is it more of a late Q3 launch? So we should think of it more ramping into the model in Q4? And then maybe just on WCDMA you did say you don't have one yet. Can you update on the time of when we might expect of the WCDMA type PC cards for you guys?

On the EDGE we're sticking to our position that we're going to be launching the product this quarter this quarter in Q3. Uncomfortable giving you any more specificity than that at this point in time. I can share with you that we've got a high degree of interest from European carriers who have deployed EDGE. And a high degree of interest from North American carriers as well. We've built already ahead of launch a pretty significant order book for the product. And we're quite enthusiastic.

We also believe that given its a QuadBand product and given its other differentiators that we're going to be highly differentiated in the marketpalce. And I think it's safe to say that there is a fair degree of end user pull for the product as well, ahead of launch. So overall we're quite bullish on the 775. But I would view Q3 as an initial launch quarter. If that gives you any directional guidance. Gaining momentum later in the second half.

As it relates to UMTX we have already announced as you know that we have a license agreement with Qualcomm for MSM 6250. We've already stated that on that In platform were going to be developing an initial portfolio of UMTS products. We have not specified what product form factor will hit the market first. But we do anticipate that our first UMTS product will hit the market in the first half of 05.

Okay Great. Nice. quarter, guys.

Thanks, Mike

Thank you. Our next question comes from Chris Umiastowski, Orion Securities. Go ahead with your question, please.

Hi guys. Very good performance obviously some congratulations. Wanted to just ask a little bit about your involvement in the PDA market in terms of having customers that are in the PDA space. Can you just give me a comment maybe Jason, as to how long you feel that any of your PDA customers will remain significant in terms of revenue contribution?

Well, you know directionall I can't give you any specific answers on that Chris. I'll share with you this. Our OEM business strategy is to provide our customers and whether they're PDA customers or smartphone customers or rugged PC manufacturers to give them a time to market advantage and to lower their development risk. Not necessarily to optimize product cost. So where customers have an urgent need to get a product to market and they're averse to developed risk or don't have the internal development RF skills, RF development skills that's where wer'e an excellent fit. And that's what we're going to continue to have success.

Maybe another way to word it would be, if you look at a year or so, do you think you're going to see other types of customers? You know talked VeriPhone. I think that's obviously a meaningful agreement. Do you think that's going to start to significantly offset some of the dependence? At least on a revenue level that you have on the PDA business right now? Obviously knowing that your gross margins are going to be lower and you're selling in very high volumes in the PDA customers.

Right. Thanks for pointing that out. Absolutely. An objective of ours is to continue to grow and to diversify our OEM customer base. And VeriPhone is an indication of our progress in that area. And I'd expect you should expect to hear additional design wins as we move from quarter to quarter and continue to diversify that base.

You know, other strategic areas we're very focused on are helping laptop OEMs as well, wirelessly enable their devices. Whether it be through an accessory like a PC Card. Our future accessory form factors or imbedded form factors. So I would expect of time that you'll see on business transition to be more diversified. And also the focused on supporting emerging opportunities with laptop OEMs.

Should be read anythin into your comment about future accessory form factors?

No, not at this time.

Okay. last question for you. The Voq you commented about it being qualified on the AT&Tnetwork. Can you just talk about who did the testing? Was is AT&T who actually qualified it?

Yes

Okay. Thanks, very much guys.

Thank you our next question comes from Andrew Lee, TD Newcrest. Go ahead with your question, please

Good afternoon. You guys could start off with the Voq mail professional and give us an update of the timing and that? And what the initial feedback has be on the acceptance of what that may be?

The Voq a mail professional is in beta trials to customers both in Europe and North America and were expecting to go to a full commercial releases on that value added software this quarter. Initial feedback I think we've already characterized on the product and we don't have anything to add to that.

Just more so David, in terms of the feedback on the actual software and the quality of comments they may or not be giving with regards to it. Can you give me color on that?

Well we've be getting feedback on the product both hardware and software for months now has we've gone through both network operator qualifications and end customer beta trials. Wnd we've been incorporating feedback from those trials into the product as we go. And that's onw of reasons that the Voq mail product will come our this quarter with the benefit of a bunch of that beta trial feedback. I don't have any itemized feedback to share with shareholders. Again, I would repeat we've gone through a pretty normal process here of beta trialing and incoporating improvements and suggestions. We'd expect the product that we're already shipping and the Voq mail profesional edition that we'll ship this quarter to be very well received.

Okay. The pricing model for that, can we still assume that combined with the device is driving towards corporate average gross margins but not immediately?

You should think of Voq as fitting our product gross margin model. And you shouldn't expect any significant deviations from that margin model.

Just switching on the OEM. I was little surprised on the sequential decline on that business. Assuming that there is a good driver on the hand-held business for that. Can you give us a sense of what the time is for when you ship your OEMs into your PDA partners. I know you can't get specific but is it a long lead time?

And that's a variable lead time. It depends on the OEM customer and also on where theyr'e at in their process of ramping specific channels. We tend to ship to our OEM customers anwehere from days to weeks in advance of their production requirement. And they tend to build their own in a production anywhere - - well, anywhere measured in weeks in advance of their channel need for product. And particularly as OEM customers ramp new channels, they have a need that's some weeks in advance of the actual end customer sell through.

The other thing that have to just always keep in mind when you thinking about the OEM business is that it's always been and we expect it always will be a somewhat lumpy business. You tend to have in relative terms a smaller number of customers. Each customer is significant and timing it affects on individual customers or even individual shipments can swing members quarter to quarter. And so I wouldn't read anything into short-term savings.

Now, we have commented, as Jason said, we have such strong growth and such over performance going on in our PC card business in particular. And we've overperformed quite significantly on our guidance for the second quarter as we did in the first quarter. At this point we see the trends for PC card growth outstripping the OEM demand. And that will blend in OEM down as a percentage of revenue over time.

Can you say whether you shipped to Veriozon? I mean for the PDAs for Verizon's new pickup for the Treo 600 in Q2?

Well I think - - you're asking us a customer specific question on Verizon and by implication on Palm as well. But I believe Verizon just announced that product in the last few days. And it should be self evident that we must have be shipping products that would be going into PDAs for the Verizon network in advance of them making it available through their channels.

Okay fair point. Customers over 20% for the order?

Our reporting threshold is 10%. We have 3 customers over 10%. And in aggregate they represented 64% of our revenue for the quarter.

Okay and last question. Just remind us of the long-term business model, please?

The long term business model, I just want to get in front of me. The long term business model on gross margin is 40 to 42 points. Sales and marketing expense at 12 to 14. R&D at 10. G&A at 5-6. That makes total OpEx range of 27%-30%. And a pretax earnings a range of 12.5% - 13%. And finally net earnings assuming a 25% tax rate which is our long-term model would be 10%. And I probably should repeat for everyone's benefit the information that Dave McLennan offered little earlier in the call.

In Q4 with 2003 our operating expense as a percentage of revenue was 35%. In Q1 through a very strong top line growth and very strong OpEx management we reduced OpEx to 31% of revenue. And in Q2 we further reduced it to 26%. And the guidance we've just given for the Q3 as to hold OpEx at 26%. Even as our topline grows significantly again. And you'll see from those numbers that we're actually running our OpEx slightly better or lower than the long term business model that I just reiterated for you.

Okay great thanks, guys.

Thank you our next question comes from [Deepak Chopra] from National Bank Financial.

Good quarter, guys. I was wondering if you could just talk about lead times that you are asking from your customers at this point given you did mention that there's some component shortages at times. I was wondering like what type visibility do you have going forward? Is it beyond 90 days at this point?

I just want to clarify. Are you asking visibility on demand or on supply?

How long basically are you asking for your customers to give you in terms of rolling forecast?

Our normal business practice which has not changed at all with our larger customers, is they give us rolling monthly forecasts ranging from 6 to 12 months in advance of their demand. And they give us orders typically 30 to 90 days in advance of the actual shipment. And we haven't changed those practices at all. We are flagging as we did in Q1, Q4, and Q3 of last year that with the higher level of growth and higher level of demand industrywide on handsets and other subscribers devices. That we are managing in an environment where there are supply constraints of some of the components. And that does restrict our ability to ramp volume rapidly against any unforecast demand. At the end of each of the last 3 quarters we've had some demand, we could not fulfill because of those sorts of supply constraints.

Is it any individual component or is it different components at different times?

At any 1 point in time there's always 1 or 2 components you're always working on. But over that span of 3 or 4 quarters it's been different components each time.

So just 1 more question. In terms as a percentage of your sales of Europe and Asia haven't done as well and they've tailed off speaking I guess about 3 or 4 quarters ago. Is it simply product mix issue or are in the Asian market are we also talking about pricing of products there?

I think it's different [Deepak] depending on the region. If you look at [Amia] as an example I mean clearly it's a product lineup issue for us. I think that European demand is actually getting stronger for wireless data. And the simple fact of the matter is a point now we don't have a UMP products in our product line up and that's hurting us. And we're relying completely right now on AirCard 750s for our business there.

We believe that changes significantly in the second half of his year as Voq gains momentum and as EDGE gains momentum. As I commented earlier, what we considered a little while ago to be surprising demand for EDGE in Europe. In Asia it's a bit of a different landscape. There is significant price competition there. But I think the big change over the last couple of quarters is a bit of relaxation in the aggressive push on the part of GSM carriers particularly in China. And that's affected us. And while we're quite enthusiastic about our recent 1X launch there, we launched an AirCard 555 with RUIM support for the China unicom network. While well we remain bullish on that we commencec initial shipments on the product sort of late in the quarter to get any significant momentum.

Okay fair enough. So just maybe 1 last quick question. How many carriers are your products certified with right now? Globally?

Over 60 I think

And how many would be testing the EDGE product right now?

We haven't disclosed that. We've got a number of operators in Europe, North America, and even handful in Asia.

Thank you, very much

You bet.

Our next question comes from Glen Tracy Pacific Internet Securities. Go ahead with your question please.

Thanks very much. Just back to the UMTS for a second. In previous calls there has been the indication that if you wanted to accelerate the UMTS product development you could. You seem to still be staying timeline as been previously announced. Have you considered events in the program or have you decided that the first half of next year is fine as far as our overall development lines?

Glen we have given a fair amount of thought to that. And frankly we like to enter into the market with well differentiated products. And so our thought process right now on UMTS and specific to PC cards is that we would prefer to enter the market with a product that has significant differentiation. And you know our conclusion is that we can do that in 2005. We could bring out a product earlier, but it wouldn't be sufficiently differentiated for our business model.

Okay. And si with regard to GPRS, again, and in meantime with regard to Europe and Asia Pacific and I guess North America for that matter. Should we expect or do you expect kind of similar levels to what you're seeing right, in terms of product demand?

Well, we're not giving any guidance on a per product line basis. But qualitatively I'll give you the same comments. We - - GPRS as a technology platform is weakening for PC cards. And in particular in Europe and in North America as replacement technologies are deployed. So what we're talking that as a bit of a transition opportunity for as we launch EDGE for a next-gen platform in Europe. And the same in North America so we're looking to EDGE and for that matter to Voq to restimulate our GSM sales as technology platform category.

Okay. With regard to the Audiovox purchase order for 299 million, you mentioned that it's going to be - - that the part's going to be delivered in Q3 and Q4. Do you have any kind of indication as to the kind of time frame that that volume of product Audiovox expects to be able to use it in terms of like do you expect it to sell through in those quarters too? Or do you have indications that this is really buy the Audiovox expects to use over a significantly longer period of time say 12 months?

I think that's a question best left for Audiovox. But I think if you have a good keen understanding of distributors business models it's not to take in tons of inventory and sit on it. It's basically a cash flow and balance sheet gain. So I would imagine Audiovox is a savvy distribution company. That they're not buying well in advance of demand and sitting on inventory. It just doesn't work for their business model.

Right. Okay and with regard to Voq in Q3 in particular given that you've just started shipping into Europe and you've got the agreements in North America and so on, is it reasonable to assume and that during Q3 it's still going to be- - the contribution from Voq although increasing as a percentage of total revenue will still be relatively small?

Well, Glen I think that's fair to say, but I think I'd give you that answer on any new product that we've ever launched. I'd pretty well have to agree with that suggestion. We just started shipments right at the tail end Q2. Q3 will be our first full quarter of shipments into our current distribution partners in Europe. And we'll have a partial quarter of shipments into our new distribution partners in North America. You should expect as you suggested that Voq will increase as a percentage of revenue. And upi shouldn't expect it to to shoot straight up meteorically right away. It takes time to build out channels to complete customer trials. And to build of a new enterprise product and that's something we've anticipated. It's something we've done with every other product the Company's launched. And we're well versed in doing that. So expect it to grow and to grow significantly in coming quarters. And don't expect ot to all happen overnight.

Last question. I'm not sure if you can answer this but I have to ask it anyways. The decline in the OEM as a percentage of total revenue seems kind of counter intuitive to a certain extent relative to say Palm One. Is there indication that they expect shipments in the Treo 600 to go from about 150,000 to the mid 200,000, 240-260,000 range in the quater. Quite a significant increase of which I would imagine a fair bit is CDMA as well. Can you give a little bit more color as to why you believe the percentage of OEM business is growing down? Like where would that be coming from?

I think first time and, specifically we just announced earlier this week on the heels of Palm and Verizon announcement the previous week that we are the supplier of the CDMA modules for the Treo 600 which is just launching in Verizon's channels. And so I guess you could say that are businees results in Q2 and our guidance for Q3 incorporate our understanding of the demand for our products within Palm's overall mix. Keep in mind the Treo 600 has more than one flavor of product and we're only the wireless solution provider for this CDMA 1X flavor.

We don't provide for GPRS or EDGE or other technologies as this point. And so our guidance does reflect our view of opportunities with customers like Palm and networks like Sprint and Verizon who carry that product. And we could as with any guidance end up with different results in real life than we've guided for. But our guidance reflects our knowledge of the business opportunity today. Okay. Thanks very much I appreciate the answers.

Thank you. Our next question comes from Gus Papageorgiou from Scotia. Please go ahead with your question.

Hi thanks, just a question on the guidance. The Audiovox contract, you're saying it $29 million in Q3 and Q4 of this year. And yet your guidance for the next order - - if you were just to split that in half. So $14.5 million if you were to assume your business were flat to the next quarter. If the rest of it were flat you'd be getting the number of 66.5 million for the next quarter. Which is substantially below the guidance that you're giving - - it's substantially above the guidance that you're giving. So I'm just trying to figure that out. Is the $29 million for the Audiovox is that expected to come only in 2 quarters or is stretching beyond Q3 and Q4?

Well I think Gus there might be a math problem there. You're treating Audiovox as as entirely incremental to our run rate and adding it. And Audiovox the orders we announced were reorders and Audiovox has already been part of our run rate in the quarters leading up to the Q3 guidance we've just given.

Okay, so it is already partially reflected in the numbers that you just received in this quarter and previous quarters?

Part of that $29 million 2 quarter run rate you just did a thumbnail calculation on part of that is already reflected in our historical run rate. And so you can't add all of it.

Okay. That's fine. I just wanted to get clarification.

Nonetheless it is a very significant order and great improvement to our visibility for coming quarters.

I'd just add that it adds a lot of certainty to the numbers going forward because they are a firm buying purchase orders in hand.

Okay. Great. Thanks.

Thank you. Our next question comes from Jeff Caball from Lehman Brothers. Please go ahead with your question.

Yes, thanks very much. Hi, guys. I have 2 questions for you. I think the first is I wanted to ask a little bit about who you feel the competition is in CDMA module? And then the other question I wanted some clarification on is why you're able to move up the lock up? And how much you thinks it's going to come off? And who may be selling in that? Thanks for much.

Okay, Jason, do you want to talk to CDMA modules competition?

Sure Jeff. From a CDMA module competition standpoint as I indicated earlier that the customers who have a tight time to market window and customers who are development program risk averse, those customers are the sweet spot for us. Some customers on some products within their product portfolio wii decide to do imbedded modules or single board implementations themselves.

So 1 competition is the customer themselves. And kind of a variant on that theme, are ODM options who will build on behalf of OEM customers either single board or module based solutions. And I'd say thirdly in terms of discrete module competitors, you know, there's a handful of smallish guys out there who compete against us head-to-head on CDMA imbedded modules. None of which we've seen so far have very good traction with getting devices certified and aprproved on North American CDMA markets. But they're guys like Any Data or wave.com. And as it the release of a lock of shares

So your question on lock up was how much are we locking up or releasing from lockup and how early. Is that correct?

Yes, David. And also these are all the AirPrime employees that are coming off lockup?

Okay. So by way of background when we acquired AirPrime last year, we set up a payment, the acquisition was in Sierra Wireless' shares. And we set up a lock up arrangement that provided 5 roughly quarterly releases. And we've already gone through the first 3 of those releases. Earlier or late last year and earlier this year. And in August release 4 is scheduled. And in November release 5 is scheduled.

And what we've done, is we've is we've agreed to accelerate release 5, the November release and combined it with release 4 which is the August release. And that has the affect of accelerating the release from lock up of 500,000 shares. The vast majority of mathematically of those shares are held by AirPrime's former financial investors. And a minority of those shares are held by AirPrime's employees, now Sierra Wireless' employees.

Okay. Fantastic. And then Jason, maybe finally for you. Do you have a sense at this stage of how the EDGE opportunity is shaping up in terms of total size versus where we were with DO maybe a year, year and a half ago?

I think it's still a little bit early to tell. 1 difference I'll point out is that the number of market opportunities appears to be greater right now with EDGE. ie there are more EDGE carriers than DO carriers in our sites. That doesn't necessarily result in a larger market opportunity for PC cards. But I think we more opportunities to sell our EDGE PC cards into.

And then that's - - how big that market gets is going to play out over time because you've got a basket of European guys in that mix who are not quite as wireless data savvy as their North American counterparts. So that's got to play out. And then you've got couple of large North American players who are quite wireless data savvy and it remains to be see how much market share they can capture. So more opportunities but in terms of overall size of that's going to take some time to play out.

Okay. Thank you all very much.

Thank you. Our next question comes from John Butcher Harris Nesbitt. Please go ahead with your question.

Thank you. It's John [Patt] for John Butcher. Just had a comment on asking if on prior calls you have indicated that the Voq mix of your overall sales can possible account for 20% of your 2004 revenues. And I was just wondering if you're backing off that statement?

Actually no. You're going to think I'm backing off, but we never said that. We've had to answer the question a number of times in a row. What we were asked last year was what- - "was it reasonable to expect that once Voq was in the market and reached a mature run rate, could it represent 10%-20% of our revenues?" And we think that could happen and we haven't changed that view at all.

Okay, thank you. And lastly, is there any active development work for the Voq in a different radio technology?

There is a very active development work beyond the first Voq which is based on GRPS. We certainly view Voq as a product family. And as a strategic product family and we have a series of Voq products including Voq products that will support radio platforms other GPRS in development.

Okay. And what is the expected availability of those products?

We will make product accouncements when we get to the right point in the development and commercial cycle. We haven't reached that point yet.

Okay. Thank you very much

Operator I think we have one more question

I just want to let you know there that at this point there was no one else in the question queu.

Well there you go, there's a missed opportunity for someone. Well I'd like to thank you and all the callers for the time this afternoon. And as always Sierra Wireless' management is available to shareholders to answer any follow up question or clarifications here at the Company's office. Our number is (604)231-1100. Thank you all very much.

Ladies and gentlemen this concludes the Sierra Wireless' second quarter conference call. We thank you for participating and ask that you please disconnect your lines now. Thank you..