司亞樂 (SWIR) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for holding for the Sierra Wireless first quarter results conference call. During the presentation all participants will be on a listen-only mode. Afterwards, we will conduct a question and answer session.

[Operator Instructions]

As a reminder this conference is being recorded Thursday, April 21, 2005. I would like to turn the conference over to David Sutcliffe and Dave McLennan.

Thank you, Operator it's David Sutcliffe, the Chair and CEO of Sierra Wireless and with me Dave McLennan, the Chief Financial Officer. Jason Cohenour, our Chief Operating Officer, is traveling today so he is not available for the call.

I'm going to get -- he beginning of the call be covered by Dave McLennan who's going cover forward-looking statements, Q1 financial performance, and then I'll take care of business highlights, product update, Dave will provide our Q2 guidance and then as usual, we'll go on to questions. With that, I'll turn it over to Dave.

Thanks, David and good afternoon, everyone. Our forward-looking statement disclaimer is as follows. Forward looking statements are not guaranteed but are only predictions that relate to future events or future performance or state other forward looking information and are subject to substantial risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed, anticipated or implied by the forward-looking statements.

These forward-looking statements relate to, among other things, our revenue, earnings and other financial guidance for the second quarter of fiscal 2005, plans, objectives and timing for the introduction of enhancement of our services and products, statements concerning strategies, developments, statements about future market conditions, supply conditions, channel and end customer demand conditions, projected or future revenues gross margins, operating expenses, profits and other statements of expectations, intentions, objectives and plans that are not statements of historical facts.

Forward-looking statements reflect our current expectations. The risks and uncertainties that may affect our actual results, performance or achievements are many and include among other things our ability to develop, manufacture, supply and market new products that we do not produce today and that may gain commercial acceptance.

Our reliance on the deployment of next-generation networks by wireless operators and increased competition.

These risk factors and others are discussed in our regulatory filings with the Securities Commissions in the United States and Canada. These factors should be reviewed carefully and you should not place undue reliance on any forward-looking statements.

On to our financial results. Our results are reported in U.S. dollars, and are in accordance with U.S. GAAP.

From the first quarter of 2005 revenue was 20.2 million. Operating expenses were 15.2 million and net loss was 7.6 million or a loss per share of $0.30.

Our results relative to company guidance provided on January 26, 2005 are as follows -- first quarter revenue was 20.2 million, slightly better than our guidance of approximately 18 to 20 million.

Gross margin was 33.5%, slightly better than our guidance range of 34 to 35%.

Operating expenses were 15.2 million, better than our guidance range of 16.5 to 17 million.

Net loss of 7.6 million, or a loss per share of $0.30 was lower than our guidance of approximately a loss of 9.2 to 9.9 million, or a loss per share of $0.35 to $0.38.

Cash flow from operations was negative $7.7 million, consistent with our guidance of negative cash flow.

Moving to Q1, in 2005 compared to Q4, 2004, revenue decreased to 20.2 million compared to 58.8 million. Gross margin percentage also decreased to 35.3% compared to 38.8%.

Operating expenses were 15.2 million in Q1 '05 compared to 15.8 in Q4 '04, and net loss of 7.6 million or loss per share of $0.30 in Q1 '05 compared to net earnings of 7.3 million or diluted EPS of $0.28 per share in Q4 '04.

During the quarter, our channels reported that inventory in the channel declined driven by reported sell through of EV-DO products. As expected, PC card revenue was lower during Q1 as a result of channel inventory that was reported as already sufficient to meet end-user demand and increased competition in the EDGE and EV-DO PC card markets.

Embedded module revenue also declined during Q1, 2005 as expected during the completion of CDMA module shipments at the end of '04 to palm one for the Trio 600.

Book sales were very modest during the first quarter of '05 as we focused on product and business activities we focussed on feeding the corporate enterprise market and engaging in a number of trial deployments.

In addition, we continued our development work on the next generation of Voq products.

Gross margins declined as expected reflecting the combined effect of the lower selling prices and unit volumes partially offset by favorable product mix.

Looking at our balance sheet compared to December 31st, 2004, our cash position increased by $11.1 million to 120.7 million, reflecting the impact of the decline in our business on operating cash flow as well as capital expenditures of approximately $3 million.

Account receivables data standing was 47 days, well within our target of 60 days. Net inventory increased to 18.7 million, up from 11.1 million at the end of last year, this larger than expect in increase in EBDO and both components and finished goods in inventory.

Looking at year-over-year performance, first quarter '05 versus first quarter '04, revenue decreased to 20.2 million in Q1 '05 compared to 21.6 million in Q1, 2004. Gross margin percentage decreased to 35.3% from 40.3%.

Operating expenses were 15.2 in Q1 '05 compared to 11.6 million the prior year. Operating expenses in Q1, 2004 included 1.1 million of R&D funding that was attributable to prior periods.

Net loss was 7.6 million, or a loss per share of $0.30 cents in Q1 '05 compared to net earnings of 4.6 million or diluted EPS of $0.18 a share in the same period of 2004.

As expected, our embedded module sales declined at a percentage of revenue during the quarter, while MP sales were strong. Product category revenues in Q1, '05 compared to Q4 '04 are as follows.

PC cards were 65% versus 62%. OEM was 11% versus 31%. MP was 21% versus 4%. Voq was less than 1% compared to 2%, and other revenue is 3% versus 1%.

All three of our major indirect channels continued to contribute to the mix. Carriers accounted for 37% in Q1 sales versus 17% in Q4 '04. Resellers were 48% versus 51% in Q4 '04. OEM's are 11% versus 31% and direct in other was 4% compared to 1%.

Our revenue, mixed by technology, in Q1 GSM-based products accounted for 31% of our revenues versus 25% in Q4, '04. CDMA-based technologies were 66% versus 74% and other was 3% versus 1%.

Revenue from new products which have been introduced in the past 24 months were 66% of our Q1 revenues compared to 82% in the fourth quarter of '04.

Looking at revenue by geographical segment, first quarter revenue from the America was 64% compared to 80% in Q4, '04. In Europe, 12% in Q1 versus 10% in Q4 and Asia PAC was 24% versus 10%.

So, revenue in all regions suffered during Q1; however, sales in Asia were relatively strong driven by CDMA sales. I would like to turn it to David now to review business highlights.

Thank you very much Dave and turning first to CDMA 2000 networks and channels and those products, probably the highlights of the quarter was the announcement with Sprint that the AirCard 580 would be available for sale.

It is now available for sale through Sprint's business sales channels under the Sprint PCS connection card brand. This product designed to operate on both EBDO and Onex Networks. It supports broadband-like speeds and supports Sprint's plans to deploy the EBDO service later this year.

The product is also backwards compatible for Onex speeds in areas where the EBDO coverage isn't available, so it is immediately in the channel and selling through Sprint.

Turning to GSM, GPRS, and edge products, we have early in the quarter announced picked a equal com 6275 chipset platform for the development of new HSDPA products. This is the next generation of the UMTS technology standard.

We announced with Nokia Networks an agreement to develop and promote end-to-end HSDPA solutions, and to jointly market those solutions to key global network operator customers.

Together with Nortel and Orange, we demonstrated the first HSDPA-PC card product at 3 GSM world Congress in Cannes, France, and we went on to demonstrate that product again at the CTA conference in New Orleans, also with Nortel.

This product, the AirCard850, a wireless wide area network card, using commercial UMPS infrastructure equipment and it demonstrates to increased speed and efficiency of the HSDPH standard in delivering data-rich content over UNTS networks.

We also announced the launch of the AirCard 775 edge product through BLEEN telecom in France and a distribution agreement with BLEEN wireless. We also added the care card 775, the AirCard 580, one of our ADVO products and the MP-775, a ruggedized vehicle product to distribution relationship with Selstar.

Turning to corporate developments, we appointed Kent Sexton, the Co-CEO of Seven Networks to our Board of Directors. Mr. Sexton has been instrumental in building wireless installation services for business and consumers for some of the world's leading operators, including 02, and this experience will be invaluable to our team.

To give an update on PC cards, during the quarter, we had aggregate channel reports that inventory of PC cards has been significantly reduced.

We also completed, following the announcement of approval in distribution, we completed our first shipments to Sprint PCS of the AirCard580.

We saw demand in the Asia-Pacific region for EBDO products continue to grow, and we're working on additional carrier certifications in that market. Our edge PC card channels continue to expand on a global basis, including the expansion in France with Wheaton telecom.

Some of the product developement initiatives underway in the PC card arena - HSDPA-PC cards, which we've accelerated the development of. These products are on track for commercial launch in the second half of this year.

We're focusing product introduction on that product, both in Europe and in North America. On the CDMA-EBDO front, we're releasing APC cards, which will bring significant up and down-link speed advantages to EBDO.

These developments will build on the strong leadership position we've established in EBDO over the past 18 months, and we're expecting that the industry will have both the buildings blocks and the network deployment on EBDO release a commercial in mid-2006.

Turning from PC cards to embedded modules, we announced during the first quarter a new EM-5625 embedded module. This is an EBDO embedded module, built on the QUALCOM MSM 5500 chip set platform.

That product is currently in certification testing with major carriers. We expect to commence production volume shipment to some OEM customers during the second quarter, and we've announced design wins to supply that embedded module already to Panasonic, ITRONICS, ATROAD, and SELCOM. We announced a new CDMA-1X embedded module design win with INTERMEC.

As we indicated last quarter, at an industry-level view, we believe that the first laptop design wins for embedded wide-area wireless capabilities will occur in 2005, and that the first resulting commercial products will come to market by early 2006.

As a result, we're currently in the process of developing a new line of mini PCI-embedded modules designed specifically to meet the needs of laptop manufacturers. During the first quarter, we received notification of our first two design wins.

We've commenced integration support with new prospective customers for these mini PCI-embedded modules.

Now, generally following the award of a design win, the embedded module sales cycle includes securing supply agreements, assisting, integration and certification, receiving forecasts and orders and finally, proceeding with commercial volume shipments.

So, there's a long road ahead on bringing these new products to market, but we're encouraged by the progress in the quarter.

An update on the Voq professional phone. Sales of the product were very modest during Q1, 2005. Our primary focus during the quarter was to continue seeding the corporate enterprise market and engaging in a number of customer trial deployments.

In the short term of product development asset including improving software features and stability. While business development efforts are focused on developing and improving our distribution channels.

Over the longer term, development is underway on next generation Voq product, along with partnering initiatives. In future, Voq products are expected to offer a new design, additional functionality and at 3G high-speed air link.

We expect the first of these new products to be available during the first half of 2006. I'd like to turn it back to Dave now for Q2 guidance

Thanks, David. We're providing guidance for the second quarter ending June 30th, 2005, which reflects our current business indicators and expectations. Inherent in this guidance are risk factors that are described in detail in our regulatory filings.

Our actual results could differ materially from those presented below. All figures are estimated based on management's current beliefs and assumptions and are subject to change.

Following our considerable revenue and earnings growth in 2004. We have experienced, as expected, a significant reduction in our business in Q1, 2005. Despite the reported decline in channel inventory, we expect that revenue will continue to be affected by the entry of competitors. We continue to be cautious in our outlook during this transition period until market share stabilizes.

Also, during 2005, we expect to increase our research and development efforts to ensure we are well-positioned with new products that will take advantage of the market opportunities associated with the deployment by carriers worldwide 3G networks.

So, for the second quarter 2005, we're providing revenue guidance of approximately $20 to $21 million. Gross margin of approximately 34%, operating expenses in the range of $16 to $16.2million, and a net loss of approximately minus $8.5 million, which translates into a loss of $0.33 per share.

As well, we expect in the quarter that cash flow from operations will be negative. Back to David to sum up.

Thanks, Dave. Well, in summary in Q1, as expected, we had a pretty tough quarter. Revenues were down. We recorded a net loss for the first time in quite some time, and we saw the combined effect of reported channel inventory and the entry of competitors affect PC card revenues.

Our embedded module business was down, as we had expected with the completion of CDMA margin shipments to palm one and our Voq efforts to the quarter were focused principally on product trials and corporate seeding programs.

While we made some great progress during Q1, and not all of it showing up on the bottom line yet. Some of these milestones were the live HSDPA-PC card demonstrations with Nortel and Orange with 3GSM, and again with Nortel at CTIA.

These demonstrations have generated considerable carrier interest and we're focused on bringing this product to market quite early.

Sprint named us as its first announced EBDO-PC card supplier, which we took some very good encouragement from in expanding the distribution for our AirCard 580. And, we received a notification of our first design wins for many PC-embedded modules.

Overall, we think that these activities validate the efforts that we're making on future products.

Looking at the second quarter and beyond, our focus for the remainder of 2005 is to make sure we're developing the right products and getting them available at the right time to capture 3-G market opportunities.

Product roadmap is very strong we feel we've got a strong product pipeline. HSDPA-PC cards expected to launch in the second half of this year. EBDO released APC cards expected to launch when service is available in mid 2006.

Embedded modules designed specifically for laptop manufacturers, and the next generation of Voq professional phone product bringing feature, size and air link enhancements in the first half of 2006.

That's it for our report on Q2 in an outlook. I will add we have our annual general meeting of shareholders is coming up on Monday, April 25 in Vancouver, and I look forward to seeing you there.

With that, we will turn it over to you for questions. Operator, if you could please go ahead.

Thank you.

[Operator Instructions]

Our first question comes from the line of Andrew Lee from TD Newcrest.

Starting off with the gross margins, David, what is it going to take to get them back toward the high 30's?

It looks like when I do that it is not really a matter of mix. I'm implying the PC card market is under pressure and is that something that's going to be the case going forward, given you have so much more competition now?

Well, I think that there's really two basic things affecting gross margin relative to the business model. One is price pressures, which you have mentioned, and the other is volume, and we'll note that with our unit volume down in the current quarter, we don't have the same per unit ability to observe manufacturing overhead costs.

So, to answer your question, what's it going to take to move gross margins back up? We have to roll out new products with increased differentiation, which will support increased an increased ability to defend and price the products and we need to get our unit volume up to start fully absorbing that manufacturing overhead.

Do you think the pricing pressure is here to stay, in term of what the end markets want to pay? You seeing these things listed to retail as $50?

None of the product in the category are retail at $50 except when a channel economically subsidizes the product.

So, I think, to answer your question, the there is an ASP trend that's been in place for PC cards for many years. We've commented on that many times in the past. We've always experienced significant price pressure in our business, and to date, been fairly successful in differentiating and commanding a premium price for a premium product.

We're not thinking that that's a different model now. It's simply an environment where you've got more competitors and more price pressure and differentiation even more important than it has been.

How do we think about differentiation with PC cards in general? I don't envision voice -- maybe I'm incorrect in assuming it, but is voice something that the market is demanding for these still, particularly as you go to the high-speed markets, or is it a matter of duality antennas?

Help us understand what can be differentiated to keep the pricing strong?

Well, the kinds of things that end customers value, particularly enterprising end customers, are quality, reliability, performance, pre- and post-sales support, brand.

They value time to market for new technologies, and they value future-proofing where they can buy, for example, customer on Sprint's network today, who might be using the Onex service can by the EBDO-PC card, the AirCard 580, use it in a Onex network environment, and have their purchase price investment protected knowing that as Sprint deploys EBDO service throughout its footprint, that the card they bought and used on Onex is usable.

It doesn't have to be replaced as EBDO rolls out. I have listed for you about 8 of the tough, most common differentiation points that our end customers tell us are important to them.

Okay. Two other ones on the inventory bump are about 70% up or about $7.5million. Is a good chunk of that the Voq and should we be concerned about that given the ramp and the revenue and the last question, 34% of revenue of products older than 2 years old.

Is that the MP line, or what is driving that kind of revenue portion that hasn't been launched over the last two years? Thanks.

With respect to inventory, Andrew, you know, it's not just Voq that is responsible for that bump-up. As you can imagine with sales slowing down here, you know, we have taken on inventory in a number of products, so it's not just Voq.

With respect to Voq, specifically, you know, we do have a plan to be able to amortize that inventory so don't see problems associated with that part of the inventory component.

With respect to the third of sales that are greater -- coming from products that are greater than 24 months old, you know, we are still-- we are in a technology transition here, and so we are still selling Onex products, for instance.

You mentioned MPs, and specifically Onex-based MPs would be two good examples of products that are a little bit older that we continue to sell.

Thank you.

Our next question comes from the line of Mike Abratski of RBC Capital Markets.

Hi, guys. Could you talk a little bit about HSDPA? A lot of carriers have been sort of mum on their plans, and most of the announcements have come from vendors.

I'm wondering if you could give us some of the momentum and critical mass out there and how that might relate to the kind of impact that you think you know your product launch might have on your performance.

Okay. Mike, well, the challenge that you have just set out is that the device vendor needs to talk about the service provider's plans when the service providers are being mum on those plans, and so that's always a challenge.

I will say that we've been pushing our development on HSDPA very aggressively. We were the first company in the world to take a commercial, a pre-commercial PC-card product and demonstrate it publicly on pre-commercial infrastructure and with NORTEL, and also with a major carrier, Orange.

For most of the infrastructure -- for most of the carriers, I should say, HSDPA is an easy infrastructure up grade. That's for carriers that are already UMTS deployed.

Frankly, UMTS at 3-G without HSDPA has a very modest data capability, and getting HSDPA deployed is essential to supporting carrier plans for higher-speed services.

So, while I can't shed any light on which carrier is going to deploy what when for you, because that's not our role to play, I will tell you that we've got very strong indications of carrier plans for deployment that has satisfied us into making this program very high priority and pushing it very hard for introduction in the second half of this year.

Okay. On your guidance, you have articulated, I think, caution due to competitor entry is what Dave was talking about. You just earlier alluded to ASP pressure.

How much of that caution is due to those two components you just talked about, ASP pressure or volumes due to sharing shelf space with competitors?

Well, I think in terms of the caution on guidance, it's not significantly attributable to ASP pressure. It's simply having gotten channels that had more inventory than they wanted to have during the first quarter and slowed down our shipments.

We're being very cautious about making assumptions at the rate at which new inventory is going to fall into those channels when there are also new competitors entering those channels at the same time.

I mean, it's an equation with a number of moving parts. We can't perfectly forecast how that's going to happen, and so we're being conservative in our expectation for the near-term.

Okay. So, would it be fair to say that perhaps being conservative over sharing shelf space is probably more, you know, prime in your that regard?

Well, you gave two reasons. One was ASP, which I don't think is a contributor, and the other is being in a channel with multiple competitors and not knowing how the market shares are going to settle out after the introduction of new competitors. That's more the driver for being careful about guidance in the short term.

Okay, and then, lastly, what is your revenue obviously higher than your guidance slightly? What occurred better than expected this quarter and why?

Well, we had some good success in getting Sprint's approval for the AirCard580, our EBDO product. That's the first EBDO-PC product they have approved and launched on their network.

We thought that was not only financially successful during the quarter but also a good success against our competitors who, of course, I'm sure, would have liked to have been in that channel first.

So, that was a good part of the quarter. We also did -- you touched some revenue. We also, without cutting the product pipeline, we were able to do some pretty good cost control during the quarter and brought our operating expense in well under the guidance, and between the revenue performance and good cost control on Orthex that made the bottom line that better than guidance.

And also I would add, Mike, we had a good quarter in our record mobile business as well, so that contributed to the numbers.

That's great. Thank you very much.

Our next question comes from the line of the line of Sarah Kim (ph) from Raymond James.

Hi, good evening. I was just wondering if you could go back on what you had just talked about with the Sprint, you were the first to approved on the EBDO product.

How long does it take to certify other vendors? So how long will you be the only vendor for Sprint for the time being?

Well, we had no way of knowing how long we will be the only vendor. It doesn't matter how long it takes to certify, because you don't know when the other guy starts, so, you know, multiple vendors compete to get into the testing and certification process.

They then work their way through that process at differing speeds based on their products' performance, and the test results, and then when you make it through, you get your product approved, and then, in our case we were able to get approval and launched through Sprint's business channels during our first quarter, and to my knowledge, our competitors haven't been able to do that yet, although it's anyone's guess when they will.

Okay, great. And I'm just wondering with reduced inventories, are you able tell how are you able to give us a bit more color in terms of visibility beyond Q2, or is that still a bit cloudy?

Well, we do have some visibility that goes beyond Q2, but it's our practice to give guidance one quarter at a time, and we've stuck to that practice through thick and thin for the last, roughly 3 years, so I don't want to try and comment on visibility beyond Q2 for -- simply because that would get into giving guidance for the third quarter.

Okay. What about, I'm just trying to your guidance for Q2 is flat, to roughly 4% sequential uptake. If you wanted to see a larger sequential uptake, could that come from the ongoing OEBD deployments with other carriers, or will that be catalogs activities that became sequential uptake become from HSDPA which is somewhere else at the end of year?

Well, the first catalyst growing revenues would be increased orders from channels for our existing products, and that would include EBDO-PC cards, and the second catalyst for increasing revenue would be the revenue associated with the introduction of new products, and we do have, as I mentioned, new products in the pipeline, including the new HSDPA-PC cards scheduled to come out in the second half of this year.

Okay, great. And just last question. Who were the 10% customers or what percentage of customers that represented the 52% this quarter?

We had two customers with greater than 10% in the quarter, and those two customers added up to 24% of our revenue in the quarter.

Great, thank you very much.

I would like to add to that a significant decrease in our customer concentration over recent quarters, and it's something we're hoping to build on in the next few quarters, so that we don't have the business of being overly concentrated in a few channels. Operator?

Our next question comes from the line of Christian Armcot (ph) from, SG Cowen.

Thank you. I was wondering if you could, within the CDMA-PC card shipments, give us an idea of the relative contribution of EBDO versus one-X and then I want to follow up on inventory, please .

Okay. We're not segmenting our results within CDMA by individual air link protocol. We did report on our segmented results between CDMA and GSM, and just to recap that, CDMA represented 66%. GSM was 31%.

So, would you comment on whether or not EBDO has crossed Onex or would you expect it to do so by the end of the year.

Well, EBDO started significant sales momentum already. I remember, the future proof is pretty strong for customer buying CDMA service today, even if they're in a Onex area, there's a pretty good argument for them to buy the EDBO-capable card it will one in Onex until they get EBDO, and then they've got a no-cost upgrade.

Okay. Thank you for that color. And then my follow-up on inventory -- with the inventory, do you expect it to stay at same, or how would you expect it to change in the June quarter?

Inventory levels in the near term should be stable to moderately up, and I don't think we'll see big changes inventory during the June quarter, and I think, you know, I think that's going to depend partly on timing of reorders and also on our management of our supply chain.

Okay, thank you.

Our next question comes from the line of Mike Walkley from Piper Jaffray.

Great. Thanks, more of a longer-term big picture question for you. When you are at lot of these conferences in dealing with your customers, can you share it us maybe some of the feedback you're getting on either the next-generation Voq and you work on HSDPA-PC cards?

Maybe I'll do that in reverse order. The HSDPA-PC cards feedback has been great because we went and actually showed our real product in real live demonstrations on infrastructure, and for people that weren't at the 3GSM show in France in February, there was a large glass pavilion set up in front of the conference center where Orange hosted public demonstrations of this card running on Nortel infrastructure.

And there was a constant stream of people, tens of thousands of people going in and out of that conference center, and a constant stream of people through the demonstration facility, and they were demonstrating to show the bandwidth and capability of HSDPA.

They were demonstrating full-length feature films being played on laptop computers, and in some cases multiple films at a time. It was a very powerful and visual demonstration, and it got a lot of people thinking about the kinds of applications that the higher-speed upgrade to the UMTS networks would enable.

So, we got, by doing those demonstrations and supporting on an actually being there with a real product instead of our news release, we got a tremendous amount of follow on interest from carriers and other prospective customers. So, it's quite successful.

On the next-generation Voq product, we're expecting to bring that to market in the first half of next year, so it's not quite as far along as the HASDPA-PC card, but we are out talking to partners about it. We are getting a range of feedback.

There are potential partners out there who just aren't signed up to the idea of smart-phones with Microsoft operating systems and our particular view on enterprise feature sets, and so those companies are unlikely to be partners.

There are other prospective partners who are very solidly behind enterprise focused smart-phones, see the leverage in the Microsoft platform like the extensions and applications that we built on to that architecture. And, we think are good prospective partners for our next-generation Voq.

Thanks. Just turning back to one more question on the near term, you talked about the channel inventory looking healthier for the industry maybe on the PC cards for maybe EBDO.

I know you're a little concerned about your competitors getting their fill of the channel, but can you maybe give us some color on how you got to that like, maybe sell-through trends that you're seeing, absolute like weeks of inventory, how it might have changed downward for the PC card market? Thanks.

During the first quarter, as we saw in the previous quarters, we continued to see, from our channel partners, very good encouraging sell-through reports. Not withstanding our own challenges in just dealing with the short-term, there's good sell-through data coming in on our products.

We don't have visibility on the sell-through data for our competitors' products. But we're quite pleased with the sell-through data we're seeing on our products, and I don't see sell-through as a source of concern.

You know, on channel inventory, we have channels in Q1 who had enough products for their near-term needs. One of the things we're noticing, and I think it's been reported on more widely then simply ourselves. Some of the wireless channels seem to be reducing their inventory targets -- that is the number of weeks or the amount of supply they're holding in inventory and pushing that inventory expectation back up into their supply chain.

So, I'm not sure how broad that shift is, but we're seeing that, and it's one of the moving parts along with the other ones that I mentioned, and you just touched on.

Thanks. And just one last question I will pass it on in terms of you do your job controlling your OpEx in the March quarter. But again you're basically flattish in terms of revenue, what is leading to maybe than $1 million type uptake in your OpEx in the June quarter?

We set our guidance with the goal with a certain high confidence level of being able to meet it, but there are no absolutes when you're making forecasts.

In Q1, we are very successful in a combination of beating the top line guidance, and controlling the OpEx, and we did that despite the fact we had a modest amount of net hiring in Q1 in support of our development programs.

And in Q2, we'll have a full-quarter run rate of our R&D costs on these newer development programs that are in the pipeline, and we're thinking that's going to make OpEx come in a little higher than it did in Q1. We will have very strong cost control in place during Q2. And so, we'll see how it actually comes out.

Thank you.

Our next question comes from the line of Gus Papageorgiou from Scotia Capital.

Thanks. Just a question on the inventory in the channel, obviously it's encouraging that the channel inventory is clearing and coming down. But, I guess my concern is with the introduction of more competitors, the price of EBDO cards seem to be falling.

I'm just wondering if some of your channel partners might choose to go to cheaper cards and might that not force you to take the prices down on some of the EBDO cards?

Well, I think that fits with the earlier questions and discussion on pricing pressures. We are seeing, as we've always seen in this market, pricing pressures, and with new competitors entering. We have a fairly differentiated product strategy.

Competitors can enter also with the differentiation strategy, or they can enter with a price-oriented strategy, and you know, it will probably take a little while not only for the channels to figure out but more importantly over the long haul the end customers to figure out which product they want to have, and is it price versed or is it features an quality and other factors first.

That's why we're cautious in the short-term, because channels sometimes make those decisions on different factors than the end customers do, so it takes times for those things to settle out.

We do have a very strong ability to drive product cost down over time. I think if you look at our financials and the gross margins, we accomplished over the last 8 quarters, we moved a significant majority of our production into a world-class contract manufacturer. We moved it into the Asia-Pacific region.

We drove a lot of product cost reductions by doing those things, and we continue to focus -- when I talk about cost controls, I'm not only thinking about operating expense, but we're also thinking about how we bring down our cost of goods, and as we do that, we improve our ability to both compete on price and to earn reasonable margins.

I know it's probably still very early, but do you have any sense on end customer satisfaction on your EBDO cards versus the competition's?

Well, it's not early at all for us to report on end customer satisfaction on our EBDO cards. We've had them on the market for about 18 months.

Our competitors, in one case, have just started shipping in the North American market in the last 60-90 days, and I have no early data on how their product is faring or even whether there's been significant volumes sold through the channels yet, so that part is too early to tell.

I would like to add, Gus, that it's interesting to note that Sprint has recently named us as their first device supplier for the card, and I think that somewhat validates the competitiveness of that card.

Great. Thank you very much.

Our next question comes from Eric Zamkus of IRG Research.

Hi this is Eric Zamkus on the line here. I have a couple of questions.

First of all, I was hoping you could comment on, I've done some channel work, and there's been some additional recent speculation that Verizon may consolidate to two suppliers using your competitors as the primary card supplier.

Number two, with regards to Sprint EBDO, while it's nice that you have a press release and an upgradable card, the deployment doesn't really start until June. Your competitors are also in the scenario where they're, you know, one of them is actually already a major supplier to Sprint.

So, how is having a press release that your card is upgradable, really being first to market when there is no EBDO deployment activity to date at Sprint and your competitors can, you know, come out with the same technology in a month?

Well, thanks Eric, it is great to get those kinds of questions because we can try to put some things to rest for you.

You're either quoting or starting a rumor that Verizon will go with two competitive products and not with ours. We haven't heard that from Verizon. I certainly don't have any information that would substantiate.

If you had anything tangible to support that we would love to look at it. After we looked at it, we would be happy to comment on it.

On the Sprint PCS front, we don't just have a news release. As I said earlier, we started commercial shipments in June to Sprint during the first quarter, so we have a news release. We have a channel that's up and running.

We have sales and revenue and earnings, contributed earnings from that product line, and to your point about Sprint not having EBDO deployed yet, I did mention in my answers to a couple of earlier questions that a customer who's buying or trying to buy a Onex card on Sprint's network can perhaps even be considering one of the Onex cards from one of our competitors at Sprint has to look at should I buy a Onex card from Sprint that can't do EBDO?

Or should I wait until June or whenever for somebody else to make an EBDO product and launch it on Sprint, or should I just buy the Sierra Wireless EBDO PC card that's already available, meets my needs immediately, allows me to get up and running, and oh, by the way if they do that, our competitors will be showing up too late to the banquet to get anything to eat.

I'm just saying based on the track record of being first to market at your last big EBDO deployment, I just kind of felt like it's, you know, a little bit aggressive to be pushing the advantage in the Sprint channel before other competitors who have publicly talked about having EBDO cards for that channel are -- have made their announcements.

Yeah, I have no apologies for us to make for us being an aggressive competitor and beating them to market with Sprint, as we did when we were an aggressive competitor and we beat our competition to market to Verizon. I make no apologies for that. You should expect us to keep doing that in each of our major product lines.

All right. Fair enough. Thanks.

Our next question comes from the line of Jeff Kvaal, Lehman Brothers.

Hi David. My question is regarding channel inventories. I'm wondering if you could comment on to what extent the channel inventories have gotten back towards-- well, perhaps the new normal is the way to phrase it. Do you think that we should -- are we 2/3's of the way there, half there? Do you think we'll arrive there by the end of the second quarter?

One of the challenges in trying to answer that question, of course, is it could vary significantly from one channel to another. That's always a challenge in addressing channel inventory at a broad level.

Overall, the channel inventories, the sell-through and the resulting channel inventory that our channels reported to us at the end of Q1 were down significantly from the channel inventories they reported to us at the end of Q4, and so, we see that as a good and solid trend, and channel inventories, in all likelihood, as long as sell-through continues, channel inventories can only go down for so long before they trigger reorders, and I think the question of what is the new norm for channels, particularly channels with multiple suppliers, we all have to see that shake out as channels and market share shakes out over time, and I'd love to be able to make a specific forecast on that, but I don't think we responsibly can.

Okay. Fair enough. The second new question is returning to Sprint. Do you think that that is a ramp for you guy folks in the June quarter or more of a second half contributor?

Well, we started earning revenues selling the -- I think you must mean the EBDO card, because we are already a supplier to Sprint. We are already a supplier to Spring on Onex PC cards and have been a supplier to Sprint for 5 years now in the PC card category.

On EBDO-PC cards, the revenue started our ability to earn revenue with Sprint on EBDO started in Q1, which we're currently reporting on. So, it's already happened. I don't know how to answer the when it will happen question. It has already started. We have already started shipping there.

Can we expect it to increase sizably through the rest of the year, or how should we think about the ramp there?

Well, I mean, I don't know. That's going to depend on whether Mr. Lay at IRG is right, that competitors can come in whenever they want and just take that volume, or whether getting to market before your competitors gives you an advantage.

It's going to depend on Sprint's market share for wireless among the other carriers, and Sprint's rate of deployment of EBDO's.

So, there's a lot of things go there and I don't know how that's all going to play out. I do know that there is a significant partner to us. We've worked with them for many years. We've got a good strong position with our EBDO product, and we're working hard to win our full and fair share of the business.

Okay. Great. Last question for you, David, is on Altell, could you talk about your progress with them and how what a priority they are for you in the U.S. market?

Right. We haven't made any announcements with Altell, so there's little I could say there. They are a company we have worked with over a period of time, and that's probably all I could say.

Okay, great.

Thanks very much.

Our next question comes from the line of Glen Tracey from Pacific International Securities.

Thanks very much. Just a couple of accounting questions to begin with Dave, on the OpEx increases in Q1, or the OpEx in Q1 rather, there is very significant increase in administration. Is there anything specific there that has accounted for that?

No, we -- I think that just reflects some of the costs that we have in Q2, you know, like BGM costs, for instance, there is a few lumpy one-time things that happened in the third quarter.

We are spending some legal dollars here as we work through the legal matters that have arisen in the past several months, and that also has an impact on our Q2 spend rate. But, you know, nothing unusual in the ramp.

Okay and for Q2, the increase that you're forecasting, is it correct that's primarily in the R&D side, or is relatively evenly spread across the marketing sales R&D Admin.?

Certainly the lion's share of focus of spending within the company is on R&D to drive the investments we're making in the products that David spoke about earlier, so that is the biggest driver, and, of course, we're turning over every rock everywhere else, that including R&D to save costs, so, you know, R&D is the biggest driver. We're being careful everywhere else.

Okay. David, can you comment on Cingular? I know I've raised this question before, but I would like to get an update now that we are another quarter through and Cingular is going through the integration of AT&T wireless, and you know, simply didn't have that great of a financial quarter.

Can you comment on how you see the relationship developing with Cingular as they have been integrating AT&T and how it might impact your overall business that you previously did with AT&T wireless and Cingular separately?

Historically, we had a stronger or closer business relationship with AT&T wireless than we did with Cingular.

Since those two companies have come together, we of course, continued working with both -- the combined company, if you will, and we have a number of products that we currently sell through the Cingular channels, through and besides Cingular's channels, and we have a goal of further building on our business with the combined company, both for the existing products we already have in those channels as well as for new products that we're bringing to market.

So, we view Cingular as a very significant wireless carrier, and a large player, currently, in the US market, and one with whom we enjoy a business relationship that's got some strong historical roots one we have to keep building on going forward.

Would you consider your current relationship to Cingular very similar in terms of overall business as you had separately between AT&T and Cingular prior to the acquisition?

Yes.

Okay. And with regard to Q2 and the guidance, I'm just curious with regard to what the guidance is based on in terms of have you seen a change in the forecasting from your significant channel customers on which you're basing your Q2 guidance, or is there still some lack of visibility as to how major channels are going to adjust their forecasting, and so, therefore, you are having to, perhaps maybe guess is a bad word, but estimate, you know, with knowledge, what you think is going to be happening in Q2?

Well, I mean any guidance or forecast is a synthesis of all the things you just said. It's the information you get from your channels, plus your own experience and your own independent data points on things like sell-through and end customer demand.

So, we set the Q2 guidance the way we did, and it's consistent with how we have set guidance in past quarters, at a consistent confidence level and using a consistent method, and so, you know, the blend of forecasts we're seeing and our own other data lead us to forecast where we are, and we'll see how it goes. You know, in the past, we've taken guidance up or down, relative to the original guidance.

If there's a high rate of change in our outlook, and if there isn't a high rate of change in our outlook, then we'll run through the full quarter and that's what it will be.

Would it be fair to say that Q2 is one of those quarters where there's enough uncertainty that you're being more cautious than you otherwise might have been in sort of a normal trending environment?

Well, I think a different way of saying that is having just come through a very challenging first quarter, and facing multiple moving parts environment, channels with inventory, channels reducing their target inventory levels and new competitors entering in some channels with that number of moving parts, it's fair to say we're trying to take a conservative view.

Okay.

I will hasten to add that doesn't mean you should take our numbers and uplift them by some arbitrary percentage.

I understand. One last question a little bit longer or further reaching. With regard to Voq, you commented on your continuing efforts in that area.

At CTIA, there were a number of new products demonstrated that have qwerty-style keyboards, and a number of products running the smart phone or pocket PC platform.

And ,I guess what I'm wondering is if your next-generation product is not expected out until the second half of sorry, the first half of 2006, are you at all concerned about the level of competition you're going to be facing and what do you see as being sort of the significant ways you can differentiate your product from the products of such large competitor like LG and Samsung and Motorola and Ben Q and these other companies that are coming out with products at a high level that are fairly similar?

Well, that's probably a multi-part question and answer, but in broad terms, we are targeting on very high-end enterprise-focused class of customers and, therefore, a device in applications and product that laser-shoot the needs of those enterprise customers and applications.

I don't think that many particularly when you cite really large companies in the competitive question, I don't know that those companies are anywhere near as tightly focused on that segment as we are.

The second thing is the products that you would have seen at the CTIA in the first quarter of 2005 are not representative of the products -- the product that we or others will likely bring out in the first half of 2006, and, in particular, we're focusing on being early to market with a full high-speed 3G air link in support of higher bandwidth applications, and so that time to market, if you will, on the 3-Ghigh-speed service is a potential key point of differentiation.

The only other thing I would add I hope I have answered your question. The only thing I would add is in my observation, and, you know, you probably all have your own views of this, but in my observation, when I look at the products that have been successful in wireless, PDA and smart phone and related categories to date, almost without exception, and certainly in the companies and products that I have looked at, it takes more than the first product launch to build a successful new product category and product line, and we knew that when we started investing in the Voq area.

We had those kinds of things in our thinking and that's why, even as we went to market with the first generation Voq, we were already underway on development with a second-generation product.

This isn't about going to bat once. It's about entering a new product category and having a series of products in that category and we're expecting to learn, refine our knowledge, gain better acceptance in the channels, and in the enterprise accounts over time. We don't think that's an overnight process for other new product entrants, and it's not proving to be an overnight process for us either.

Okay. Thanks very much.

Our next question comes from the line of Aem Amy (ph) from JP Morgan.

Hi gentlemen this is Amy for Paul Coster. I was hoping you'd give a little visibility into the data card space, specifically. We've seen your carrier partners now offering a variety of plans and subsizing cards. What are you seeing in terms of rate of adoption and penetration in aggregate?

Well, we would probably suggest that for rate of adoption and penetration rates, it's worth looking at third-party market research data.

The challenge for us in trying to answer that kind of question as a single vendor in the category is that we would have to work off of sell-through data from specific partners, and that's very sensitive data.

So, I really would encourage you to look at the third-party market research firms. There are a couple of firms that focus in on this area and the due published market share and adoption and penetration data. We buy that research, and I think it is accessible to shareholders as well.

Okay. Maybe I can phrase it a bit differently then. In terms of momentum for specifically your cards, has anything changed from what we saw in the fourth quarter to the first quarter?

I think we haven't seen any big inflexion points in either direction relative to reported sell-through in the fourth quarter.

The first quarter was a continuation of trends we've been seeing for a while, and that's I'm answering that question on a sell-through basis, because that's the only way I can think of to deal with end customer adoption.

Okay, great. My second question is in regards to you mentioned the next-generation of Voq coming out in the first half of '06. Should we assume them as the mix in terms of Voq as the contributor of key revenue is going to remain roughly flat until we see, you know, another product come out?

Well, we do have plans to continue selling the first Voq product, and to put further marketing and development investment into that product. One of the areas we have been working on in development is enhancing software, and from a marketing point of view, we expect to put some pretty good push behind that in coming quarters.

So, I would expect that revenue from the Voq product line in its first generation. But we don't think that's going to be a huge contributor to revenue. It's going to be a moderate contributor to revenue, and we see a next-generation product is opening up of some additional growth opportunity.

Okay. Just one more question, if I could. In terms of the design wins, with Panasonic and others, is that expected to be a more material contribution to revenue, in terms of making up some of the OEM business that was lost over this last quarter?

Well, I think that the OEM business has always been lumpy as individual design wins turned into commercial products and then run through their own product life cycles.

We see the embedded module space as we've seen it this way for many years, as a very key part of a blended product portfolio. It's important to have the embedded modules, because, overtime, we see wireless functionality increasingly migrating into a variety of devices.

And in recent quarters, and then again today, we've certainly highlighted the fact that we're investing additional development dollars in building new embedded module products that are targeted specifically at laptops.

We started to make some good business development progress in those areas with some early design wins and integration activities.

And so, you know, it's a long process to bring an OEM design win all the way to market, but as we are able to do that with these embedded modules, we think that will be significant contributor to revenue, and undoubtedly, it will probably be lumpy again too. It's just the nature of the embedded modules business.

All right. Thank you.

Our next question comes from the line of John Bucher from Harris Nesbitt.

John Bucher, Harris Nesbitt. Question for you on the chip with the Nokia networks. Is there any possibility that might extend to any of Nokia's other business units, potentially the enterprise business unit?

Well, today, the relationship is as we announced it, and I will -- I mean, I suppose anything is possible, but I don't see any reason to suggest that that relationship is going to expand in the near term.

We're focused with Nokia's infrastructure group on being able to offer end-to-end HSDPA solutions to network operators. That's the focal point of the relationship and it's what both companies got together to work on.

So, who knows what could happen in the future, but you know, certainly you should think of it as we have described it to date.

And one final question, Dave. Are you finding that on the bid and proposal activity on the OEM front that you're primarily focused on the laptop sub-notebook opportunity, or is there still some activity in the hand-held computing arena? Thanks.

Well, there is lots of life in the hand-held computing arena as it relates particularly to industrial class products or rugged class products.

And then, having said that, a lot of our new activity, a lot of the new opportunities we're seeing relates to the laptop-class products, and the opportunity to put wide-area solutions and can bet the OEM to laptops.

Operator, I'm just looking at the time and thinking we have probably taken all the questions we can take on the call right now, but if we left anyone's questions unanswered, as always, management is available to take those calls.

The company's phone number is 604-231-1100. And we welcome any follow-up. With that, we will hope to conclude the call.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.