司亞樂 (SWIR) 2004 Q3 法說會逐字稿

Thank you for holding for the Sierra Wireless third-quarter results conference call. I would like now to introduce your chairperson and your speaker, Mr. David Sutcliffe.

Thank you, Operator, and welcome to everyone on the call. I'm David Sutcliffe, the Chair and CEO of Sierra Wireless, Inc., and I have with me the Chief Financial Officer, Dave McLennan, and our Chief Operating Officer, Jason Cohenour. We'll be having Dave McLennan do the forward-looking statements disclaimer, review our Q3 financial performance, and then Jason will cover business highlights and a product update. Dave will cover the Q4 financial guidance. I'll summarize things, and then we'll go to questions, as is our tradition. So with that, I'll turn it over to Dave McLennan.

Thanks, David, and good afternoon everyone. I'll -- I'll start with our forward-looking statements disclaimer. Forward-looking statements involve risks and uncertainties, including, but not limited to, changes in technology and changes in the wireless data communications market. These forward-looking statements relate to, among other things, statements about future market conditions, supply conditions, channel and end customer demand conditions, revenues, gross margins, operating expenses, profits and other expectations, intentions and plans which are not historical fact. Our expectations regarding future revenues and earnings depend in part upon our ability to develop, manufacture, supply and market new products which we do not produce today and that may -- that meet defined specifications. 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.

And now on to our financial results. Our results are reported in U.S. dollars and in accordance with U.S. GAAP. For the third -- for the third quarter of 2004, revenue was 59.1 million, operating expenses were 15.4 million, net earnings were 7.1 million and diluted earnings per share were 27 cents. Our results relative to the Company guidance provided on July 21, 2004 are as follows. Third quarter revenue was 59.1 million, better than our guidance of approximately 57 million. Gross margin was 39%, consistence with -- consistent with our guidance range of approximately 39 to 40%. Operating expenses were 15.4 million, higher than our guidance of approximately 14.8 million. Net earnings were 7.1 million, better than our guidance of approximately 6.4 million, and cash flow from operations was 8 million, consistent with our guidance of positive cash flow. During the third quarter of 2004, in operating expense we recorded an additional restructuring charge of $300,000 associated with our facilities restructuring originally announced in 2002. This charge included a 200,000 foreign exchange loss. Elsewhere on our statements, in other income we had a foreign exchange gain of approximately $300,000.

I'd like to move on to our financial performance on a sequential basis, comparing Q3 to Q2. Revenue increased to 59.1 million from 56.1 million, an increase of 14.6%. Revenue increased, due primarily to an increase in demand in North America for our PC cards and OEM products. Gross margin percentage decreased to 39% ,compared to 40.5%, as a result of product mix and new product introduction costs. Operating expenses were 15.4 million in Q3 2004, compared to 13.5 million in Q2 of 2004. Our operating expenses increased as a result of increased revenue, as well as product and market development costs, including the Voq Professional Phone and the AirCard 775 for EDGE networks. At 26% of revenue, our operating expense leverage continues to be exceptionally strong. Net earnings were 7.1 million, or diluted earnings per share of 27 cents in Q3, compared to net earnings of 6 million, or diluted earnings per share of 23 cents in Q2.

I'd now like to move on to our financial performance year-over-year, Q3 '04 versus Q3 2003. Revenue increased to 59.1 million from 26.3 million, an increase of 125.3%. Revenue increased, due primarily to an increase in demand in North America for our PC card products and CDMA embedded modules. Gross margin percentage decreased to 39% from 40.7%, as result of product mix and new product introduction costs. Operating expenses were 15.4 million in Q3 '04, compared to 11.5 million in Q3 of '03. Our operating expenses increased compared to Q3 due primarily -- Q3 2003, due primarily to additional costs to generate increased revenue, the acquisition of AirPrime, which was completed in August of 2003, costs related to the development and marketing in new -- of new products, including the AirCard 775 for EDGE and the Voq Professional Phone, and finally the additional facilities charge, which was largely comprised of a foreign exchange loss. Net earnings were 7.1 million, or diluted earnings per share of 27 cents in Q3 '04, compared to a net loss of .9 million, or a loss per share of 5 cents in Q3 2003. Year-over-year on an adjusted basis, net earnings were 7.4 million, or diluted earnings per share of 28 cents in Q3 '04, excluding the restructuring charges of $300,000, compared to net earnings of 1.1 million, or diluted earnings per share of 6 cents in the prior year, excluding restructurings and -- and integration costs of 2.2 million and the Metricom recovery of 200,000.

Moving on to the balance sheet, compared to June 30, 2004, our cash position increased by $5.7 million to 127.5 million, driven primarily by strong cash flow from operations. DSO on accounts receivable decreased slightly to 38 days from 40 days at -- at June 30, well below our target of 60 days. And net inventory increased to 8.6 million from 2.9 million. This reflects an increase in both component and finished goods -- finished goods inventory, principally supporting the growth in revenue.

With that, I'd like to turn it over to Jason, our Chief Operating Officer, for business highlights.

Thanks, Dave. I'll begin with progress in our CDMA line of business. First, we announced an agreement with a Tirumala Seven Hills, a telecommunications company in India, to distribute the AirCard 555 CDMA 1X card to the India marketplace. Commercial shipments of the AirCard 555 to Tirumala are expected to commence in the current quarter. We also announced that we're supplying the Sierra Wireless EM3420 embedded module to Symbol Technologies for their MC9000 family of industrial mobile computing devices. The MC9000 with the embedded 3420 has also now been certified by major CDMA operators in the U.S., and commercial shipments have commenced. We announced that Treo600 Smartphone by PalmOne, with integrated Sierra Wireless EM3420, is now certified and available from Verizon Wireless.

Moving on to our GSM line of business, which includes EDGE, we signed an agreement with Onda Communication Spa to distribute our new EDGE PC card to Telecom Italia Mobile. The commercial launch of the EDGE PC card, which is cobranded by Onda and TIM, marked the worldwide premier of our EDGE product line. We also note with interest that over 100 operators around the world now have plans to deploy and launch EDGE services. We announced an agreement with Intel to deliver integrated wireless connectivity solutions to mobile professionals. Under the agreement, Intel and Sierra Wireless with collaborate to develop and promote integrate wireless LAN and wireless WAN solutions, with a goal of improving the end user experience. With our jointly developed solutions -- solution, users will be able to easily roam from Wi-Fi networks to wide-area wireless networks, and receive consolidated billing from their carrier. And some news subsequent to quarter end, the AirCard 775 for EDGE networks has been approved and launched by AT&T Wireless at a price of $299. AT&T customers are also eligible for a $150 carrier rebate when signing up for unlimited data rate plans.

Moving on to Voq, and starting with a reminder that we commenced initial commercial shipments of the Voq Professional Phone to KPN in the Netherlands during Q2. During Q3, we announced the commercial availability of Voq through KPN. KPN has been selling Voq at a retail price of 99 euros, in combination with a 2-year business select voice and data plan. Also during Q3, we announced that the Voq Professional Phone is now commercially available across Europe through a number of other distribution partners, including A&C Systems in Belgium and Luxembourg; BagLAN in Turkey; Cedros in Austria, Germany and Switzerland; Daimler in the Nordics; Dangaard Telecom across western Europe; Hugh Symons and Yes Telecom in the U.K.; Speeka in Italy; and from Xacom Comunicaciones in France and Spain. We announced that the Voq Professional Phone is now available in North America as well, through members of Intel's product dealer or IPD program. That includes TigerDirect and Tech Depot. In addition to the IPD channel, we announced commercial availability through Insight, MobilePlanet and RCS Computer Experience. We have seen retail pricing for the Voq ranging from 299 to 499, depending largely on the AT&T rate plan selected by the customer. We announced distribution agreements with Bright Point and Sell Star to supply Voq to our dealer and carrier channels. In addition, we announced network approval for the Voq on the AT&T Wireless network.

I'm now going to take a moment and comment on where we are with Voq and where we're going. In some ways, we're dissatisfied with our progress on Voq to date. In others, we're very pleased. We've now launched Voq in both Europe and in the U.S., and commercial shipments have commenced, albeit somewhat later than we desired. We have a strong start on building channels of distribution across both regions, and we have a growing list of application partners, some of whom have already ported their software to the Voq platform and have demonstrable solutions. We have an aggressive corporate seating program underway, and the early results are positive. We have actually received excellent press and analyst coverage on Voq in Europe and in the U.S. The product reviews have largely been very positive, with Voq -- with Voq comparing favorably with other Smartphone-class devices. Our feedback from customers and channel partners has been excellent, which gives us confidence that the product capabilities and positioning are on target.

Going forward, we will continue to expand our channels of distribution for Voq and to work directly with corporate enterprises on approval and deployment activities. We will also continue to work with carrier partners to ultimately approve and distribute the product. Next year you can expect to see new Voq products coming to market with new feature sets and supporting additional air links. And I'd like to make 1 point very clear. We remain strategically committed to the Voq product line and believe in its differentiation and positioning. We continue to invest in the category and believe that over time, Voq will be a significant positive contributor to our financial results.

Moving on to segmented financial performance, our revenues by product segment were as follows: PC cards accounted for 67% of our revenue in Q3, compared to 55% in Q2; OEM products accounted for 30% of our revenue in Q3, compared to 32% in Q2; MP products represented 1%, compared to 10% in Q2; Voq accounted for 1% of revenue, which was the same as in Q2; and other accounted for 1%. So once again, PC cards and OEM sales were strong during the quarter. Going forward, we expect PC cards, Voq and MP as a percentage of our revenue mix to trend up, and for OEM as a percentage of our revenue mix to trend down. Our revenues by distribution channel were as follows: carriers 23%, resellers 47%, OEMs 30%. Our 3 major indirect channels continued to be quite strong during the quarter.

Moving to revenues by technology, first GSM, which includes EDGE, represented 8% of our revenue in Q3, compared to 9% in Q2; CDMA accounted for 91%, compared to 90% in Q2; and CDPD and other was 1%. Revenue from new products, that is products introduced in the past 24 months, accounted for 79% of our Q3 revenue. Moving to revenues by geographical region, they were: Americas 91%, compared to 94% in Q2; Europe 5%, compared to 3% in Q2. Europe was up 83% quarter-over-quarter. Asia-Pacific represented 4%, compared to 3% in Q2. Asia-Pac was up 57% quarter-over-quarter. Of course, both those gross -- growth rates coming off of a small base. Overall, our business in the Americas was once again very strong in Q3. While still lagging, Europe and Asia had their strongest quarter of the year, driven mainly by improving CDMA strength in Asia and initial shipments of Voq and EDGE PC cards in Europe. We expect product channel technology and geographical segment percentages to fluctuate quarter to quarter, based on mix and new product introductions.

Now moving to an update on demand trends, we expect revenue growth in all 3 geographical regions in Q4. This growth will be driven by demand for currently shipping products, as well as new products, including the AirCard 775 for EDGE and Voq. Demand for our PC card and embedded modules continues to be strong, and Q3 was another record sell-through quarter. New orders in Q3 were also very strong, giving us excellent visibility on Q4 revenue overall. Demand in Q3 for our EBDO PC cards remained strong, particularly in the U.S., and we're expecting this trend to continue in Q4. We also note that Verizon is continuing to expand its EBDO network aggressively, and that Sprint is also now planning to deploy EBDO. As an early innovator in the EBDO space, we believe we are well positioned to benefit from this network expansion.

I'll now pass it back to Dave, who will cover Q4 guidance.

Thanks, Jason. We are providing guidance for the fourth quarter ending December 31, 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. We expect to make significant CDMA module shipments to PalmOne for the Treo 600 during the fourth quarter. By year end, we expect to have completed the shipment of orders on hand, and currently do not have visibility on further shipments for this product with PalmOne. And just to put our OEM in the context of our overall business, OEM revenue as a percentage of total revenue declined from 43% in Q1 of this year to 32% in Q2, to 30% in Q3, and we expect that OEM revenues, including sales to PalmOne and our other OEM customers, to represent less than 25% of Q4 revenue. The specifics on guidance, our actual results could deliver materially from those presented below. All figures are estimates based on management's current beliefs and assumptions, and are subject to change. With respect to revenues, we see revenues in -- in Q4 of approximately $63 million, gross margins stable in the range of 39 to 40%, operating expenses in the range of 16 to 16.9 million, and net earnings of approximately 7.7 million, or 29 cents per share, and, finally, cash flow from operations continuing to be positive. And I'd just like to note with respect to this guidance that as a percentage of revenue, operating expenses are lower and net earnings are better than our long-term business model.

With that, I'd like to pass it back to David.

Well, thanks very much, Dave and Jason. To summarize, and looking first at Q3 which we've just completed, this was our ninth consecutive quarter of revenue growth, operating profitability and positive cash flow. Generally, we're at or exceeding our key long-term targets in our business model, and earlier than we expected. Shipments of PC cards and embedded products had solid growth, and North American revenues were exceptionally strong during the quarter. We're now shipping 2 major new products, the AirCard 775 for EDGE and the Voq Professional Phone, both in North America and in Europe. Turning to Q4 and beyond, our demand is currently very strong, our bookings are up and our visibility for the fourth quarter is very good. We'll continue to develop new products, including products for EBDO, EDGE, and UMTS. We'll continue to expand our distribution channels and focus on sell-through for the new Voq Professional Phone, and our priorities across our whole product line will be to expand our channels, sell through to end customers, and continue making investments for future profitable growth. With the positive cash flow we've got and a very strong balance sheet, we're well positioned to capitalize on those opportunities, and they'll continue to be our focus. That is to say, our focus will be on profitable growth.

And with that, Operator, we'd like to take it over to questions from the callers.

Thank you, ladies and gentlemen. If you have a question, please press the numbers 01 on your touchtone keypad. If you are calling from a speakerphone, if possible pick up your handset before pressing the numbers 01, and if you wish to leave the question queue at any time, press the pound sign. And when I do announce your name, please ask your question. Our first question comes from Deepak Chopra, National Bank Financial. Please proceed with your question.

Good quarter, guys, and good guidance.

Thank you, Deepak.

I was wondering if you can talk a little bit about the Voq. You know, there's I think a lot been made that the Company hasn't been able to sign up major carrier partners at this point, but could you tell us a little bit about, you know, from your -- that -- the Voq internet channel and what type of prospects you're seeing there, and, you know, give us a sense of what percentage of the Smartphone market you see the channel contributing to overall sales in terms of the market perspective? Because I think people -- you know, I'm just trying to get a better sense of whether, you know, the channel's a lot stronger than we generally give it credit for and not just the carrier side.

Deepak, this is Jason. I'll answer that. I'm not sure how much strength you're -- you're crediting to that channel, but -- but I'll comment. I -- you know, as I indicated in my commentary on Voq, I think as it relates to timing and carrier lineup right now, or channels, we're not satisfied with where we are. We're behind where we'd like to be at this point in time. However, my -- I think that we've made excellent progress in noncarrier channels of distribution and in collaborative efforts with other carriers, like -- like AT&T Wireless. And -- and I think that you need to be careful not to underestimate the power of noncarrier channels of distribution. It's an area of our business we've always focused on developing. We've always believed in having a diversified channel lineup that includes both nonoperator reseller channels, as well as operators. At this point in time, with the current version of Voq, we're going at it mainly through nonoperator channels. We tend to have excellent end user relationships. We're collaborating very closely with them and other partners, like Microsoft and Intel, to not only develop those channels but also directly develop enterprise opportunities.

Okay. Fair enough. Maybe talk a little bit about the PalmOne business. I guess in the press release you indicated, you know, effectively no visibility after Q4. I was wondering, in terms of your best guess, do you expect, you know -- like from our perspective is that business doesn't go from something to zero immediately. It will gradually fall off or decline over the course of a period -- a time period. You know, is that the Company's sense at this point, that we'll still see some shipments to PalmOne after Q4, or is PalmOne building up inventory to then just do it themselves after that point?

Well, we said in the news release, and I'll reiterate for the benefit of everyone on the call that hasn't had a chance to look at it, that -- that we expect to make significant module shipments to PalmOne for the Treo 600 during the fourth quarter, and by year end we expect to have completed the shipment of orders on hand, and we currently do not have visibility on further shipments for this particular product with PalmOne. So a short answer to your question, I -- I can't get into what Palm's doing in terms of inventory build or the product life cycle plan for the product. That's really for them to answer, but in terms of our plans we expect to be finished shipping the orders we have this quarter and not -- and we currently don't have visibility on -- on further orders beyond the end of Q4. I'll also remind you of the additional information that Dave McLennan provided as part of our guidance, and that is that OEM revenue from all customers, including PalmOne, has declined from 43% in Q1 to 32% in Q2 to 30% in Q3, and we -- and our guidance for Q4 is based on an expectation that OEM revenue from all customers combined in Q4 will be less than 25% of our revenue.

Thank you, David.

Thank you.

Thank you. Our next question comes from Gus Papageorgio with Scotia Capital. Please proceed with your question.

Hi. Thanks. Congratulations on another good quarter. Jason, I'm just wondering if you could discuss the EDGE 775 modem a little more in terms of where -- going into your fourth quarter versus the third quarter, talk about channel expansion and, in particular, if you could highlight opportunities in Europe.

Sure. Well, the -- the -- the 2 opportunities that -- that we've inked in terms of deals and in -- in terms of commercial shipments we've, of course, already announced and that's to TIM in Italy through a partner of ours in Italy called Onda, and directly to AT&T, and -- and then through AT&T channels. We've got the AirCard 775 in carrier labs at additional carriers, both in North America -- well, North America, in Asia, including China, and in western and eastern Europe. We do expect to -- to see other carriers accepting commercial shipments of the 775 in Q4, particularly in -- in Europe as -- as those carriers get ready for launch. And -- and as I have commented on earlier, we're seeing surprising strengths out of our European team for -- for EDGE PC cards.

Was there any shipments to AT&T made in this quarter? Did AT&T have any impact on this quarter in terms of product?

Yes -- yes, they did.

Great. And, Dave McLennan, just a question for you. Could you -- sort of, could you talk about the inventories a little bit -- a little bit? I mean, inventory days shot up there and the -- the level is high. I'm just wondering could you -- tell us about what -- when do you expect to get back to kind of normal inventory levels?

Well, you know, I -- I wouldn't view being at -- at a little over $8 million for the end of this quarter, that's up about 5 million from the previous quarter, as -- as an abnormal situation, Gus. You know, I think it's driven by the volume of our business and -- and, you know, we are -- we are -- we do have some component and finished good inventories in the -- you know, coming on to our balance sheet reflecting the growth in our business.

Well, where would you normally like to have inventory, Dave? I mean, it looks -- based on my numbers, you went from 9 to 22 days, so is there a kind of a range that you are targeting?

Well, I think, you know, right now we're at about 2 and a half weeks of -- of inventory and -- and, you know, I think -- you know, around that and -- and possibly even a little -- a little higher would not be -- you know, an abnormal target.

Okay. Great. Thanks.

Thank you. Our next question comes from Andrew Lee with TD Newcrest. Please proceed with your question.

Just a housekeeping first. The tax rate in the quarter was a little bit lower. An explanation for that, if there is one, and what's the tax rate assumption for your Q4 guidance?

Yeah. I think as we, you know -- as we see the -- the year roll out and business in various jurisdictions with -- with various tax situations, you know, our -- that -- that reflects our current booking of about 15% in the quarter, and it will be approximately the same rate in Q4.

Okay. Your long-term rate is -- remind us, 25?

Yes, it is.

Okay. The customers that -- your top customers, can you give a split on that?

We had -- in -- in the quarter we had 3 customers greater than 10%, and they totaled to 69% of revenue.

Okay. Great. When you look at the -- the Palm situation and the AirPrime legacy relationship for the -- I think it was the Treo 300 and then following with the 600, can you provide any detail -- this is the first public conference call you -- you guys have had when it's become clear that you will not have the Treo 650 business -- as to what it took for you to lose that business? Was it pricing, was it technology, integration team? If there's any color you can provide just so we can understand the prospect of Sierra for -- for follow-on Palm business beyond that design loss.

Andrew, I think it would be very awkward for us to go into any detailed anatomy of that, because we would be laying out Palm's decisionmaking process and their decision criteria, and I think I'd like to have them do that, which they -- they may or may not ever choose to do. We certainly have full visibility on -- on the -- on the process they went through. Like most of our OEM partners with each new generation and each new product that they are -- have on their drawing boards, they consider a number of alternatives, including make versus buy, modules versus completely integrated, an -- an internally developed solution. So there -- there's a number of different variables here, and I -- I think at the end of the day that's for them to comment on if they even choose to. For us, we have had a very strong business relationship with Palm over a couple generations of product, as you've described. We don't expect to have content in the Treo 650, and you -- we continue to the -- to the real root of your question, to believe the OEM business is a strong and viable business for the Company. We're earning attractive revenues and margins from other OEM customers and we expect to continue doing so, and in terms of our forward R&D, we're putting our money where those thoughts are by developing next-generation embedded modules for the major higher-speed wireless network technologies that we're already supporting with PC cards and other categories of devices. So you should expect us to continue to make design wins, as we have in recent quarters with companies like VeriFone and Symbol, to continue to invest in the category and, in time, to announce future design wins as we earn them.

Okay. That -- that -- that's great. Two more quickies. OpEx guidance, does that exclude amortization, Dave?

No, that -- that would include amortization.

Okay. And lastly, on -- on the Voq phone -- in the past you've mentioned network electronics, I believe in Asia-Pac, you don't -- you're not shipping into Asia-Pac yet, and when would you target that? Is that in the Q4 numbers?

We -- we have -- our major focus at launch for Voq is -- is in North America and Europe, and that's not to say we won't look at opportunities in the Asia-Pacific region, but -- but, you know, in terms of initial launch focus, it's -- it's North America and Europe, and our guidance for the fourth quarter includes all of our anticipated Voq business during the quarter.

Which would not include Asia Pac?

Well, it -- it could include some -- what I will characterize for the moment as incidental Asia-Pac business during the fourth quarter.

Okay, great. Thank you.

I -- I'll go 1 step farther, you know, beyond -- because your -- your question was specific to the fourth quarter. As you look at 2005 and 2006, we would expect to take the Voq product into selected markets in the Asia-Pacific region.

Okay. Thank you.

Thank you. Our next question comes from Mike Walkley with Piper Jaffray. Please proceed with your question .

Great. Thanks, guys. Just a -- a little -- little more on the Voq. I'm wondering if you could you give any color -- Jason, you've talked about more interfaces. Can you kind of lay out your road map in '05, maybe give us some color on timing on when we could expect next-generation Voq products?

Well, unfortunately, Mike, we can't give you too much more detail, other than our road map does include more than 1 new Voq, you know, over the next 12 to -- to 18 months covering more than 1 additional air link and -- and introducing new -- new -- new feature sets, new form factors, etc.

Okay. That's fair. And then just -- just building -- I know you've talked about working with 6250 chipset from Qualcomm that's getting pretty good reviews in the industry. I'm just wondering if you can update s on the timing of products, whether it's an embedded module or a Voq or a PC card, just if -- the timing, is that still sometime in the first half of '05?

Well, we do expect our first UMTS product to come to market during the first half of 2005. That expectation hasn't changed. We have not laid out a -- publicly a product road map for which -- which form factors we'll come to market with first, and that's something from a product -- from a commercial announcement point of view we're just not ready to do yet.

But you can count on it being 6250 base, Mike, when it does come out.

Okay, great. And just, I guess, 1 final question. Maybe you guys -- you -- you say you feel well positioned in the EVDO market heading into 2005 --a lot of concern about Kyocera and [inaudible] starting to ship cards in the beginning of the year and what that does to your projection in EBDO. Maybe you guys can just give a little color on how you see the EVDO market maybe playing out next year for you.

Well, how -- how things got started in the EVDO market specifically in North America, we developed 1 of the very first EVDO PC cards. AirPrime developed another, and last June, that is June 2003, we announced the acquisition of AirPrime in August of 2003. We completed that acquisition, and since then Sierra Wireless, including its acquired AirPrime business, has been the major supplier of EVDO PC cards to Verizon Wireless, and we've expected since we did that acquisition that -- that there would be new competitive entrance into the space and eventually they'll get products qualified on Verizon's network. Frankly, we are amazed at how long it's taking competitors to get through the development cycle, get products through the carrier approval cycle and get them on to the market and -- and we think that it's inevitable that they eventually will, but surprising how long it's taking. So, our business outlook for our business on EVDO, and including with carriers like Verizon, is that new competitors will enter the space. We will compete with them, as we have in many cases directly in the past, and we expect, and our guidance reflects, our expectation of the share of the market that we should be able to win in the face of that expected competition.

Great. Thanks a lot. And congratulations --

Just a -- an additional comment on that, Mike. We -- we also see EBDO expansion beyond Verizon Wireless. Sprint, as you know, has announced EBDO, and we're actually seeing some demand for EBDO in Asia as well.

Any -- and comment on maybe VIVO, who just launched it also down in Latin America?

No specific comments on VIVO.

Okay, great. Thanks. Congratulations on a strong quarter.

Thank you, Mike.

Thank you. Our next question comes from Glen Tracey with Pacific International Securities. Please proceed with your question.

Thanks very much, and just to echo everybody else, congratulations on a strong quarter.

Thank you.

Thanks, Glen.

Jason, you spoke already about the Voq and the fact that, you know, in some ways you're disappointed with the -- I guess the uptake on the -- on the product. Can you comment on anything that you are kind of directly trying to address with regard to the product that you think is limiting the uptake at this point?

Well, I think -- I think what I said I was disappointed in was the -- the timing of getting the product into the market and -- and our lack of carrier channels. I'm -- I'm not -- I'm not at a point where I'm dissatisfied with end user uptake. In fact, while I it's going to be a long, hard, grind-it-out process, with corporate enterprises we've gotten excellent feedback from the corporate enterprises who currently have the product and corporate enterprises who are on the list to be part of our seeding program.

Okay. So, what -- what do you think is causing the -- I guess the slow uptake or later than expected uptake through the carriers themselves?

Well, I -- you know, I think that's probably a question best left to the carriers, but I -- I think late -- I think our own lateness in getting to market with the product was probably a factor there, and I think another factor is the trend on the part of carriers to be a little more hesitant when they -- when they invest significantly in -- in -- in new products. Many of them now are pushing inventory to third parties. We're seeing that more and more. It's happened -- it's happened now with -- with Voq, as well as a number of -- of other handsets -- handsets that are in the market. So that's a general trend we're seeing and -- and I think more and more carriers want to see some kind of track record, particularly from new players like us in the handset market, of end user success before they -- before they make a big investment.

How -- how do you think the merger between AT&T Wireless and Cingular may or may not affect the Voq in North America?

I -- I have -- I have no expectation of any negative impact. The -- the -- in the positive impact you know, we'll have a single, much larger carrier. And -- and I -- and I think that that has a chance of having a positive impact, not only on Voq but also our other products, including EDGE PC cards and -- and future products we've got on the road map for new air links.

Can you comment on whether or not you are end-carrier testing with Cingular?

I can't comment on that.

Okay. Last question, with regard to the OEM business you say significant revenue from PalmOne in Q4. I'm just wondering, can you give us an idea what you would consider a minimum threshold in terms of percent of revenue to be considered significant?

Well, we -- we don't have a definition that equates significant to a revenue threshold, but -- but all of the OEM customers combined, we're expecting to come in at less than 25% and we don't have a floor percentage to give you for 1 customer being significant.

Okay. Last question. Just -- Sony Ericsson, I guess, has announced this -- I believe it's the GC89 for EDGE and Wi-Fi. Do you have any comments as far as how you see the 775 competing against the quad-band GC89 in that space?

Well, year, we certainly do. The first thing is that the AirCard 775 is already shipping into the market, and the Sony Ericsson announcement is just that, it's an announcement of a product that's expected to be available next year. The second comment is that it's -- it's -- it's significant to us that Sony Ericsson has already been shipping dual and tri-band PC cards into the AT&T channel for some time now, and that we've successfully entered that channel, commenced shipment and have strong marketing support and -- and pricing support by AT&T around the new AirCard 775. In Europe, the AirCard 775 is the first EDGE PC card product to go to market. It's quad band, which give a global roaming capability, and we've got a great headstart on Sony Ericsson in the EDGE carrier community in Europe. I think actually the -- the EDGE PC card arena is going to be a great proving ground for our company to demonstrate what it's done a number of times in the past, which is that we're quite capable in our own product categories of competing with companies, both smaller competitors that you're all familiar with and larger competitors like Sony Ericsson.

Great. I'm glad I asked the question. Thanks very much, guys. Congratulations on the great quarter, and good luck in the future.

Oh, you bet. Thank you.

Thanks, Glen.

Thank you. Our next question comes from Joe Noel from Pacific Growth. Please proceed with your question.

Yeah, actually my questions have been answered. Thank you.

Thank you. Then our next question comes from John Bucher with Harris Nesbitt. Please proceed with your question.

John Bucher. Appreciate your candid comments on -- you know earlier in the call on -- on the mixed results on the Voq. I'm wondering if you could say whether support for EDGE might have been a factor, or lack of support for EDGE might have been a factor, or whether -- we're, of course, talking now with respect to -- to carrier adoption -- whether there's another factor or feedback you've gotten from there associated with the user interface or the -- the physical form factor of the product itself?

Yeah, I think -- I'll comment specifically as it relates to the -- the EDGE air link capability. You know, the functionality that we've implemented on the Voq we believe works very effectively over GSM and GPRS, but there's no question that some carriers who have invested substantially in EDGE and who have deployed networks have a preference for EDGE-enabled devices, so -- so that could have had an impact.

You -- but as far as the actual user interface and the physical form factor of the handset itself, that -- that you don't think was a significant attributing factor?

No, I -- I really don't. Overall, from -- you know, from carriers who have elected to take the phone into testing, from carriers who have elected not to take it into their channels, we've -- we've received nothing but positive -- positive feedback on the -- well, I shouldn't say nothing but, but mainly positive feedback on the -- the form factor, the product concept as a phone first device that also implements effective e-mail and messaging, that also implements a secure e-mail solution that doesn't require a third-party server or service in the middle. That product positioning and concept and its implementation in the current Voq handset has received very positive feedback from carriers, end users and channels. Now we've got to grind it out.

I don't want to put you in a position of having to do too much speaking for the carriers, but I'm wondering, you know, at this stage in the game do you think that, you know, implementing EDGE in a -- in the next couple of quarters or so, you know, might put you in the same position of, you know, getting GPRS a couple of months back, or do you think you go straight to wideband CDMA?

Well, you know, those -- those are not mutually exclusive, John. We have EDGE in our product portfolio today and in other form factors like PC cards, and we have UMTS on our product road map and -- and already being very activity developed in -- in -- in -- in other product form factors, so we have the ability, whether it's EVDO on the CDMA side or EDGE or UMTS on -- on the GSM community side of things, to put different air links into the Voq platform, and -- and we would like you to think of the Voq line as a platform. The first Voq is a GPRS -- has a GPRS air link on it, and we are developing additional Voq products which will support additional air links and will -- will eventually be rounded out into a new family of products.

Okay. Thank you. One final question, just sort of a -- a modeling question. I'm still sort of struggling with on the model how the PalmOne OEM revenue's up sequentially significantly when the -- when the OEM is down. I mean, there's probably you know, perhaps mix with -- with other customers in there, but if you could just help me out there in the modeling I'd appreciate it. Thank you very much.

Okay. Well, I -- I -- I would say, John, I -- I don't recall us saying that PalmOne revenues were up significantly sequentially, certainly not in the context of talking about either Q3, which we've reported on or Q4 which we've provided guidance for here. OEM revenues as a whole have been declining as a percentage of revenue all year and that trend is -- we -- we commented on a couple quarters ago that trend continues, and the dollar -- if you -- if you turn those percentage figures into dollar figures, our absolute dollars of revenue on OEM over the course of the year have been relatively flat, and so -- so I think that that -- you know, when you're trying to model our OEM business minus the Palm business, you need to keep those -- those things in mind, and I don't think it would be right to say that we've been growing sequentially on PalmOne in the quarters we're talking about.

Thank you very much.

Thank you. Our next question comes from John Grandy with Orion Securities. Please proceed with your question.

Thank you very much. Maybe a -- a high-level question. When I look at your current balance sheet, I -- I -- I have difficulty seeing how you're going to find a --a use for all of the cash. I -- I know that -- that strategically it's important for you to have a strong balance sheet, but I wonder if there's any further thinking on the part of the executives or the board or -- as to how that cash might be deployed going -- going forward?

Right. Well the purpose in putting that cash on the balance sheet was twofold. One, it was to provide the Company a very strong and -- and liquid financial position with which it could demonstrate both to its supply chain and to its channels and customers that it's a financially strong and long-term player in the industry. And the other purpose of -- of cash on the balance sheet is to provide the Company with ready access to capital for strategic opportunities as they arise. The first use of cash is -- is a continuous benefit to the Company and doesn't require us to take the cash off the balance sheet and put it anywhere. And the second use of cash, that is the strategic use, is 1 which over the history of the Company we've always been very judicious with. The company's 11 years old. In the last 4 years we've done 2 significant transactions. One was a -- a -- a cash -- an all-cash transaction where in 19 -- in 2000, I should say, we acquired an embedded modules business from Qualcomm, and the other transaction was shares as consideration and cash to fund the integration and working capital requirements around the AirPrime transaction, which I referred to earlier in the call. In terms of future strategic opportunities, that's the kind of thing I think it would be incorrect for us to speculate on any specifics, other than to say that -- that we're an aggressive player in our industry commercially and that we do strategic transactions infrequently and when we think they provide great value for our shareholders.

Do you see any -- anything out there right now, without going into specifics at all, are there opportunities out there that -- that might be of interest to you?

Well, I'll tell you this. We always are out -- out in our industry monitoring what's going on and what other opportunities -- we're doing this call from San Francisco today, where we're attending the CTIA wireless internet trade show, and -- and as one of the leading companies in our product category in the industry, we're always out there and we always have our eyes and ears open.

Thank you. Our next question comes from Paul Dombrowski with Ascent. Please proceed with your question.

My questions have been answered already. Thank you.

Thank you. Our next question comes from Ray Sharma with GMP Securities. Please proceed with your question.

Thanks very much for taking my questions. I've got a question for David Sutcliffe just to start, because you didn't make mention in regards to the UMTS product. Maybe I missed it but, Dave, are we still on track for the original guidance that UMTS PC cards would be out in the first half of '05, and is there any additional color you could add on to that?

Right. Well, again, as I touched on a few minutes ago, and Jason touched on as well, are -- we're expecting to bring our first of a family of UMTS products to market during 2004. Our guidance on that from the -- sorry, 2005. Our guidance on that from the outset has been that we would have the first of those products come out during the first half, followed by additional products afterwards, and we've not been specific that the first product or any particular product in the UMTS category will be a PC card, so just to make sure we're all operating on the same basis. And to the second half of your question, no, there's no change in our outlook on UMTS.

Okay. That's good. Just as -- second -- I've got 2 more questions, 1 question just on Intel. Could you -- could you help us just get a sense, you know -- the press release or the announcement was excellent from a business development point of view, but from a -- from a financial point of view as to how you think that relationship is going to evolve, can you give us just some -- some color on -- on -- on the nature of the relationship from your side of things and how you could see things develop as far as end sales?

Sure. I'll comment on that, Ray. This is Jason. From a business development standpoint, I think the relationship is -- is very meaningful, because I think as we make roaming from Wi-Fi networks to Wi-Fi -- to wide-area wireless networks easier for end users, and as we make user credential authentication easier for the operator, the extent to which we do that successfully -- and I think this first collaboration with Intel accomplishes that -- the extent to which we do that successfully, I think, will drive end user adoption and carrier adoption of wide-area wireless PC cards, particularly carriers who -- who -- who own both hot spot and wide-area wireless data networks. So I think that's meaningful and -- and working with Intel. We are currently going direct to operators who fit that description, both in the U.S. -- well, pardon me, in the U.S., in Europe and in Asia, promoting this capability. Furthermore, strategically, I think it just makes a whole lot of sense for the -- for the 2 companies to continue to work closely together on -- on product initiatives like this. Clearly Intel has a -- has a vision and road map for what wireless data is going to be in the future, as do we. And I think that we both see opportunity for collaboration, not only today, but in the future as well as the landscape changes.

Thank you. That's helpful. And maybe 1 last question. And Jason, you -- you mentioned earlier about how EDGE [inaudible] over 100 networks. It's certainly a surprise to me on the uptake of EDGE through carrier networks throughout the world and -- and it seems to me to be a pretty -- pretty significant PC card opportunity for Sierra Wireless, as well as -- as others, but could you just help us understand from your point of view how you're planning to tackle EDGE beyond the initial carriers, and -- and what kind of uptake we could have? Clearly, when you look at the split in revenues today in terms of CDMA and -- and GSM, there's a -- a very heavy bias towards CDMA. Do you expect that trend [inaudible] reversed a little bit with the -- with the -- this [inaudible] of EDGE?

Yeah, I -- I definitely -- I definitely believe that that -- that trend is going to reverse. If you look back historically on -- in our technology mix on revenue, it -- at one time I believe our sales in GSM exceeded our -- our sales in -- in -- in CDMA. So clearly, the launch of new GSM products, like our EDGE PC card and for that matter like Voq, will -- will tend to -- will tend to change that percentage mix on -- on technology platforms, so I expect to see GSM grow. And in terms of how we're going to -- to tackle the -- the opportunities, well, there's a lot of work ahead, right? We -- we got our AirCard 750 for GPRS approved on something like 40-plus networks around the world, and that was not an insignificant task, so as we -- so as we look at our EDGE deployment, we're going to have to go through the same thing, targeting those 100-plus carriers for -- for network approval and ultimate launch of the product. We're engaged in that now. We're leveraging the same channel for distribution that we already had in place for our GSM products and -- and -- and getting good traction on those opportunities.

Okay. Thanks very much, guys.

Sure.

And at this time there's no further questions holding in the question queue.

All right, Operator. Well, thank you very much, and to the attendees on the call, thank you very much as well. We look forward to reporting fourth quarter results late January 2005. Thank you.

Thank you, ladies and gentlemen, for participating in the Sierra Wireless third-quarter results conference call. On behalf of myself and the rest of the teleconferencing team, thank you for choosing TELUS.