司亞樂 (SWIR) 2005 Q3 法說會逐字稿

Thank you for holding for the Sierra Wireless third quarter results conference call. As a reminder, this conference is being recorded Thursday, October 27th, 2005. I'd like to introduce your speaker, David Sutcliffe.

Thank you, operator, and welcome to the call, everyone. I'm David Sutcliffe and I'm the retiring President and CEO. I have here with me on the call, the company's COO and the elect-- or designed President CEO. Jason will be taking over tomorrow and I have with me Dave McLennan, the CFO.

I'm going to do some introductory remarks and touch briefly on CEO succession. I'll be then turning it over to Dave McLennan to deal with the financial performance and Jason's going to cover the rest of the call from there, business highlights and conclusions.

So with that, briefly on CEO succession, I announced my plans to retire last April at the company's annual general meeting and since that time the board of directors has undertaken a comprehensive search process. It was led by a four-member search committee and we had the assistance of the executive search firm, Spencer Stuart.

A strong field of both internal and external candidates was considered and we looked at people throughout our industry. The benefit of announcing my retirement publicly was everyone in the industry knew the job was available and that got us a lot of interest. At the end of the process, the board concluded that the best person to run the company was, in fact, our COO, Jason Cohenour, and he's been appointed as our incoming President and CEO.

Just by way of a little background, Jason joined Sierra in 1996 and since August of last year has served as the company's COO and, as such, he's been instrumental in the key strategic decisions which we've made in recent months, which have refocused the company on our core business and which have led to the recovery that you're starting to see in our financial results.

Prior to becoming COO and since 2000, Jason was SVP Worldwide Sales with the company. He's got cross-functional experience in sales, service, marketing, product management, manufacturing operations, mergers and acquisitions, corporate governance and strategy and he's also got extensive relationships with the company's key stakeholders and has been active in the development of the wireless data industry since 1988.

All of these factors and particularly Jason's very strong leadership skills made him the right person to lead the company to the next level and so it's with great pleasure that I'm able to make that announcement today on behalf of the board and I know that you'll all be looking forward to Jason outlining both our performance to date and our plans to go forward. Just before he does that, though, I'm going to turn it over to Dave McLennan for the numbers. Dave?

Thanks, David, and I'll just start with our forward-looking statements disclaimer. This conference call contains forward-looking statements that are not promises or guarantees but are only predictions that relate to future events or our 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 fourth quarter of fiscal 2005, plans, objectives and timing for the introduction and 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 and the following words and similar expressions generally identify forward-looking statements. Words such as “may,” “plan,” “expect,” “believe,” “intends,” “anticipates,” “estimates,” and “predicts.”

The risks and uncertainties that may affect our actual results, performance or achievements are many and include, among others, our ability to develop, manufacture, supply and market new products that we do not produce today and that may not gain commercial acceptance, our reliance on the deployment of next generation networks by major wireless operators and increased competition. These factors and others are discussed in our regulatory filings with the securities commissions in the United States and Canada. These factors-- these factors should be reviewed carefully and you should not place undue reliance on any forward-looking statement.

And now on to our financial results. Our results are reported in U.S. dollars and are in accordance with U.S. GAAP.

For the third quarter of 2005, our revenue was $27.5 million, gross margin was $9.6 million, operating expenses were $14 million and our net loss was $3.1 million or a loss per share of $0.12. These results include an incremental income tax recovery of approximately $500,000 pertaining to an adjustment to our accrual for 2004 taxes payable.

Our results relative to company guidance provided on July 20th, 2005, are as follows. Third quarter revenue was $27.5 million, better than our guidance of approximately $24 million. Gross margin was 34.9%, above our guidance of 31%. Operating expenses were $14 million, slightly over our guidance range of $13.7 to $13.9 million. Net loss of $3.1 million or a loss per share of $0.12 was better than our guidance of a net loss of $5.7 million or loss per share of $0.22. Cash from operations was a negative $900,000, consistent with our guidance of negative cash flow.

Looking at our results sequentially, Q3 2005 results compared sequentially to Q2 2005, excluding the impact of Q2 restructuring and other charges of $19.2 million, were as follows. Revenue increased to $27.5 million from $21.9 million, an increase of 25%. Gross margin percentage increased to 34.9% from 31.2%. Operating expenses declined to $14 million compared to $15.3 million in Q2. As a result of the increase in sales and gross margin and decline in operating expenses, our net loss declined to $3.1 million or a loss per share of $0.12 in Q3, down from a net loss of $7.5 million or $0.30 per share in Q2.

Revenue increased primarily due to increased sales of EVDO PC cards and shipments of new embedded module products, partially offset by lower sales of EDGE products. Gross margin percentage increased reflecting favorable product mix and the positive impact of high shipment volume, as well as reduced operations costs, which are included in gross margin. Revenue from the sale of previously written-down Voq units was $600,000 for the quarter, which yielded $200,000 of gross margin.

Operating expenses declined to $14 million in Q3, down from $15.3 million in Q2. This decline reflects the cost reduction measures implemented as part of our Q2 restructuring and a continued focus on cost management. Included in Q3 operating expenses is $400,000 for the employees who are working on-- who were on working notice during the quarter following the Q2 restructuring. Excluding these working notice charges, operating expenses for the quarter were $13.6 million or $1.7 million below Q2 operating expenses of $15.3 million before restructuring and other charges.

Looking at our balance sheet compared to June 30th, 2005, our cash and short-term investments decreased by $3.5 million to $102.2 million, reflecting the impact of negative cash flow from operations as well as capital expenditures of approximately $2.5 million.

We had a significant improvement in inventory levels during the quarter. Inventory declined to $4.2 million, an improvement of approximately $6.2 million during the quarter.

I'd like to hand it over to Jason to talk about some of the business results underpinning the numbers.

Thanks, Dave. I'm going to start first with our financial performance as segmented first by product line.

Revenues from PC cards represented 71% of our revenue in Q3 versus 75% in Q2, an increase of 18% quarter-over-quarter. Revenue from OEM represented 11% of our revenue versus 7% in Q2. OEM revenue was up 107% from Q2 to Q3. Revenue from our MP products represented 12% of the total versus 15% in Q2 and revenue from MP was roughly flat. So PC card sales were up considerably over Q2, embedded module sales were up as we commence new embedded module product shipments and MPs were strong, once again.

On to revenues by distribution channel. Carriers represented 52% of our mix, resellers 34%, OEMs 13% and direct and other 1%.

On to revenue by technologies. Revenue from our GSM products, including EDGE, represented 31% of the total in Q3 compared to 44% in Q2. Revenue from our CDMA products represented 65% of total revenue in Q3 versus 53% in Q2 and revenue from other products represented 4% in Q3 versus in Q2.

During Q3 we saw a significant growth in our CDMA business, driven mainly by increased sales of our AirCard 580 EVDO PC cards and our new CDMA embedded modules. Revenue from new products, that is, products that have been introduced in the past 24 months, represented 82% of our business in Q3 and that's up from 79% in Q2.

Moving to revenue by geography, revenue from the Americas represented 75% of Q3 revenue compared to 58% in Q2. Revenue from Europe represented 6% of our revenue in Q3 versus 14% in Q2. And revenue from Asia-Pac represented 19% of our Q3 revenue compared to 28% in Q2.

Revenue in the Americas was up significant in the third quarter as compared to Q2, driven mainly by increased sales of our EVDO PC cards and shipments of new embedded module products. Asia-Pac had another strong quarter, while revenue from Europe was down on lower sales of EDGE PC cards. We expect revenue from Europe to trend up over time as we launch new HSDPA products in the region.

Moving to an update on business development, I'll start with our activities in the-- in our OEM business. The third quarter was strategically important for our OEM business and for the wireless data industry as we saw major laptop OEMs announce plans for embedding wide area wireless capability into their platforms.

We became the first company in the world to develop and bring to market EVDO embedded modules for laptop manufacturers. Two of our customers, Lenovo and Panasonic, announced that they have integrated our EVDO modules into some of their laptops and have now launched these wirelessly enabled platforms.

During the third quarter we commenced shipments of our EVDO PCI Express MiniCard modules for laptop manufacturers to Lenovo and other OEMs. Our EVDO MiniCard is the industry's first standards-based form factor for wide area wireless embedded modules. Early innovators like Lenovo and H-P recently demonstrated their platforms with our embedded EVDO MiniCard at the CTI-- CTIA wireless IT trade event.

Development of our first HSDPA MiniCard module remains on track for launch in early 2006 and some laptop OEMs have commenced integration activities with this module.

We have design wins from major laptop manufacturers for both of these products.

At Sierra, we have long held a vision that major laptop OEMs would eventually embed wire area wireless capability into their products. We believe that this vision is now well underway to becoming a reality. We also believe, based on our long history of successfully enabling mobile computing devices with wide area wireless, that we are exceptionally well positioned to lead in this emerging and potentially high-growth sector. We have a high level of business development activity happening with other major laptop OEMs, as well, and believe that we will earn additional design wins.

I'll now provide an update on our PC card business, starting with activity in currently shipping products. We continued to make solid progress with our EVDO PC card business. Sales of our EVDO PC cards were up considerably in Q3 over Q2. We continue to ramp our AirCard 580 shipments to Sprint and are encouraged with the level of sales activity and early reported sell-through there. We believe that our first-to-launch position at Sprint is helping us capture strong channel share. AirCard 580 sales to Telstra in Australia and Telecom New Zealand also continue to be solid during the quarter.

We also note that EVDO PC card-- that the EVDO PC card market continues to experience increasing competition, particularly in North America.

Sales of our EDGE PC cards were down slightly in Q3 following an exceptionally strong Q2 when we had a number of new carrier launches in Asia and Europe. And also during the quarter we announced that the City of Aurora, Colorado, and that the Royal Canadian Mounted Police selected our rugged MP products for their field deployments. Sales of our MP products were once again solid in Q3.

Moving to an update on our new PC card product initiatives, we have completed the development of our first HSDPA AirCards, the AirCard 860 for North America and the AirCard 850 for Europe and Asia. The AirCard 850 and 860 are fully functional HSDPA PC cards that are backward compatible with UMTS, EDGE and GPRS out of the box. They are not UMTS PC cards that are future upgradeable as others have announced.

We believe we are on track to be the first to market in the world with a fully functional HSDPA PC card and earlier this week we announced that we won a supply agreement with Cingular Wireless for our AirCard 860 HSDPA product.

We expect to commence commercial shipments of the AirCard 860 to Cingular this quarter. We also expect to commence shipments of the AirCard 850 to European customers during Q4 and that the product will be a key factor in helping us drive revenue and market share growth in Europe.

Development of our EVDO Rev A PC card product also remains on track and we expect to launch this product in the second half of 2006.

Some general comments on business development -- our channels reported solid sell-through of our products during Q3 and our channels also reported that channel inventory continued to trend downward. Bookings in Q3 were very strong, as they were in Q2, giving us good visibility to Q4 revenue. Our book-to-bill was greater than 1 in Q3.

I'm now going to pass the presentation back to Dave to cover Q4 guidance.

That's Jason. We are providing guidance for the fourth quarter ending December 31st, 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.

Our guidance for the quarter includes a higher-than-usual contribution from new products. There are uncertainties associated with product launches which could result in the company not achieving its guidance. All figures are estimates based on management's current beliefs and assumptions and are subject to change.

We expect the fourth quarter to show sequential improvement over the first 3 quarters of 2005. Accordingly, we are providing guidance for the quarter as follows -- revenues of $32 million, gross margin of 33%, operating expenses of $14 million, which results in a net loss of $2.9 million or $0.12 a share. We also believe cash flow from operations will be negative.

In addition, to meet anticipated demand going into 2006 as we launch multiple new products we anticipate increasing inventory on hand for selected products from current levels. This will be a use of cash during Q4.

Jason, back to the summary?

Great. So some summary comments. During the third quarter we saw continued improvement in the financial metrics of our business. Revenue for the third quarter was up 25% compared to the second quarter to $27.5 million, driven by strong sales of our PC cards and new embedded modules. Gross margin was up considerably and operating expenses were down.

This resulted in a lower net loss and reduced cash consumption compared to Q2. We witnessed a milestone event in our industry as major laptop OEMs announced their plans to embed wide are wireless into their platforms. We have taken a lead position in this emerging and potentially high-growth space by being first to market with EVDO embedded module solutions for laptop OEMs. We also announced major design wins and launches I think Lenovo and Panasonic.

Our development programs for EVDO and HSDPA standards-based MiniCards have gone very well. We have commenced shipments of our EVDO MiniCards to Lenovo and are on track to launch our first HSDPA MiniCard in early 2006. And, again, we have design wins from major laptop OEMs for both of these modules.

We completed the development of our HSDPA PC cards and expect to commence commercial shipments to Cingular in the U.S. and to European customers during Q4.

We are guiding for continued sequential growth in our top line and an improving bottom line as we bring new products to market. Our focus for the remainder of 2005 is to continue to execute on our new product pipeline and the business development activities related to bringing these new products to market. We are also tightly managing our operating expenses while being careful not to put key programs at risk as we expect these programs to provide the foundation for continued sequential growth and a return to industry leadership and profitability.

And some closing comments. As I-- as the incoming CEO of Sierra Wireless, I'm very excited by the opportunities before us. Our core business of wide area wireless for mobile computing offers ample opportunity for growth. This is a space where we have considerable experience and a legacy of leadership.

We have all of the essential elements in place for success -- a growing market, an excellent team, a strong and growing customer base, a rejuvenated product line and financial resources. Our priorities now and for the foreseeable future are continued strong execution on our core business initiatives, continued sequential growth and a return to profitability.

And with that, operator, I'll open the line for questions.

[OPERATOR INSTRUCTIONS] Christin Armacost, S.G. Cowen.

I was wondering if-- a couple questions. On the embedded laptop opportunity, how aggressive do you think the carriers are going to be in subsidizing the PC cards-- I'm sorry, in subsidizing or promoting this in conjunction with some of the PC card-- the PC manufacturers? Or do you think that the laptop manufacturers are going to be the primary drivers of promoting the embedded functionality? And then I have a followup.

OK. Thanks. So a couple of things. We are not party to the agreements between the laptop OEMs and the wireless operators. So we don't have clear visibility on what the compensation model is between those two parties. We do-- we are aware that there is one.

And I would-- I'd be careful not to assume that wireless operators are going to subsidize the cost of hardware that we and others are selling directly to the laptop OEMs. I think that a more natural model is that the laptop OEM will serve, essentially, as an agent for getting activations for the wireless operator and, in return, for acting as an agent receive compensation. And what the laptop OEM does with that compensation is really up to them, whether or not they want to subsidize the price down or increase margin on the sale.

OK. And then while you-- while Sierra Wireless was first to announce HSDPA into Cingular, since that time Novatel and Option have also indicated that they'll be in there in Q4. So I just wanted to see what you thought the competitive landscape was and do you expect the HSDPA market to be more competitive than the UMTS market?

Well, I don't know. I think it's going to be a competitive market for sure and I think that because we are ahead of our competitors on developing HSDPA products it stands to reason that they would react to our news to being first to market.

I do think Cingular's going to be a competitive situation. I don't think that Cingular has publicly disclosed that they're going to do any HSDPA business with Option. So that would be surprising. But I do think you should expect to see at least-- at least two or three players in the Cingular channel.

We've got a long history of goodwill and joint business development at Cingular and we are first to market with Cingular and I'm very confident that we'll take a very strong channel share there.

Mike Walkley, Piper Jaffray.

First, Jason, I just wanted to say congratulations on CEO. But following on, maybe just touch a little bit more on the HSDPA opportunity? Can you maybe quantify the number of European carriers you might be shipping to in the near term here?

Well, we're not-- unfortunately, we're not quantifying that now. We've been-- as you can imagine, though, since we announced our intentions and did demonstrations in-- at 3GSM in February we've been very busy in our European business development efforts. We have a lot of legacy relationships in Europe because we were once in the GPRS business, as you know, and have channels already built and good relationships already there.

So it's a pretty broad-based initiative. Our aim is to be first to market in Europe with fully functional HSDPA products. We are not an incumbent in Europe, so that presents some obstacles to us, but we're confident that we'll get our fair share on this first round of HSDPA based on our first-to-market status and existing relationships with operators there.

Great. And just a little more clarity on the nice sequential guidance for Q4. For your CDMA EVDO card it looks like that had a nice rebound in Q3. Can you, maybe, break out your uptick in revenue? Would the CDMA EVDO cards be up again sequentially in that guidance? Or how much of it is HSDPA and some of the new modules?

We're not-- we're not providing specific product line guidance, Mike. So the best I can do for you there is we did, as we introduced guidance, mention that it has a higher-than-normal percentage of new products in the mix during Q4. So code there is that there's a significant chunk of HSDPA products and new embedded module products.

Having said that, to give you some kind of directional feel for EVDO, we had very strong demand in Q4 for our EVDO products and we have order-- orders for Q4 delivery in EVDO, as well.

OK, great. And then I guess you said also the sell-through trends have been pretty solid from what you're seeing on the Sprint information. Is that fair to say?

Yes. So far, so good. I mean, that's, candidly, a little bit of a black art, but some channels, Sprint included, give us pretty reliable sell-through information and so far it looks pretty good.

Andrew Lee, T.D. Newcrest.

Just on the-- the comment was that you guys are trialing with H-P, I believe, at CTIA, on the embedded side. Do we assume that's your other major OEM partner for EVDO modules?

I think the-- actually, the comment was that H-P did a demonstration using our EVDO embedded module inside their platform at CTIA Wireless IT.

And there's nothing to assume there as to that's your partner at this point in time?

You can assume all you want. We're not disclosing anything on that.

OK, good. And the HSDPA side embedded module, in the prior quarter I believe you mentioned it was one of the existing 2 OEMs that you had for EVDO. Is that still accurate?

I'm sorry, Andrew. Can you repeat that question?

I'm sorry. I don't know what's wrong with the sound. The-- the HSDPA module that you have designed in is it with Lenovo and the other existing EVDO OEM?

We haven't disclosed who our design wins are for HSDPA yet and that's out of respect for confidentiality provisions we have with-- with those OEMs.

OK. PC cards -- on the EVDO PC cards, are you guys still shipping into Verizon?

We did make shipments to Verizon in Q3 and we anticipate making shipments to Verizon in Q4.

OK, great.

Andrew, just to be clear there, we are not the lead PC card in the Verizon channel, but there is customer demand and when there's customer demand they order product and we ship it.

Maybe you can just go a little deeper with that, Jason? There's now 3 other suppliers at Verizon. You commented on competition, but can you give us some detail as to what happened from being the lead supplier to being not the lead currently?

Well, I-- I think we've talked about that many times, candidly, and the fact remains that being-- being a 100% market share player is unnatural, particularly in a product category when it takes off.

Verizon did see the product category gaining momentum and-- and did what is rational. They got more competitors into the channel. There's now 4 there, which is a lot of competitors. Notwithstanding the growth in the market, that's still a lot of competitors. And, quite candidly, we're not the price leader at Verizon and I'm sure that has an impact on the level of promotion that they put behind our AirCards.

But based on our relationship with-- with corporate enterprises and government customers and the brand recognition by those customers, there's-- there's demand that we're stimulating in the field and Verizon's responding to that demand and that's why we're getting repeat orders. But we're not getting the benefit of the big promo push.

OK. Last question on pricing, how that was in the quarter for PC cards and for the embedded modules? I know you guys don't disclose specifics. Can you give us at least a range as to what ASPs could be for the embedded modules, contingent on volume, of course?

Yes, I think we've-- on embedded modules we've stated that our ASPs range anywhere from the low $100s to $200. That's highly contingent on 2 things -- technology platform and volume. And you could expect that the large laptop OEMs with whom we're getting design wins are targeting high volume and they're getting the benefit of high volume prices.

But, again, there's a technology difference. As an example, an HSDPA module will be more expensive than an EVDO module because the product cost is higher.

OK. And then PC card pricing?

PC card pricing -- it remains a competitive environment and we haven't seen undue erosion on our ASPs in PC cards, but it's a-- but it's a tough pricing environment.

Deepak Chopra, National Bank Financial.

First of all, congratulations, Jason.

Thanks, Deepak.

I was just wondering, in terms of Europe, can you help us understand the relationship between you and Nokia and Nortel and how are those vendors helping you penetrate some of the European accounts? Are they instrumental in that process with European carriers or are you just using your previous relationships to leverage in to those areas?

I'd say those relationships are helpful, for sure. We're probably getting most of our business momentum from our own grassroots efforts, but we are sharing joint business development activities with those guys. As part of the agreements we have with them on infrastructure IOT, we provided them with a number of early samples of our AirCard 850 and they're using those to promote the sale of their infrastructure and that often results in joint sales calls. So there's definitely a help there.

And then in terms of carriers where you're the third vendor coming in or the second vendor coming is it-- can you help break it out in terms of is it technology or price that's going to get you into those accounts at this point? Like, given the early part of the-- sort of the product cycle for HSDPA?

There's always myriad factors that go into that decision on the part of the carrier, ranging from relationship to, in some cases, the local partner we have supporting those relationships to price, of course, to market timing. And the extent to which market timing is important on HSDPA, right now, we're-- we feel like we're advantaged there.

And I think that in some of our legacy relationships we feel like we're advantaged on relationship, as well. But there is a certain power of incumbency there with Novatel and Option, in particular, and we're going to have to chip away at that.

So I think with this-- with this first round of HSDPA launch for us in Europe we're going to get-- we're going to get some incremental momentum. I'm optimistic about the carrier wins that we're going to get.

I'm also very optimistic by the-- by the laptop OEM initiatives that we have going on and the planned European launches by those laptop players. We think that's going to help us position with a number of the carriers in Europe.

Is the margin profile for HSDPA cards at the beginning of the product cycle similar to what we've seen in previous product cycles with EVDO and so on? Like sort of same type of numbers it would start at and then gradually decline or are we going to start at a lower level, just given some more competition up front this time around?

I think in absolute terms the margin model will be-- will be lower relative to past years, Deepak, but the profile as you go through a-- a product life cycle would be similar.

OK. That's great. And, maybe, Dave, just one last question. You mentioned there were some Voq sales in the quarter. Could you just mention what the contribution was to the top line and the margin again? I missed that.

Sure. In the quarter we sold about $600,000 worth of Voq product, Voq handsets, and that contributed about $200,000 of gross margin.

OK. That's great. Thank you.

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

Jason, I had a couple of questions for you and, Dave, also 2 for you.

In terms of HSDPA can you tell-- I mean, to a degree, you are dependent on the carriers and their rollout plans. Can you characterize the rollout plans in North America and Europe? Are they on schedule, ahead of schedule? And when do you think we'll get to kind of reasonable penetration, 25%-plus or the POP.

And also, on your EDGE card, do you think the anticipation of HSDPA cards is hurting edge sales temporarily while the market prepares for that shift?

And then, Dave, for you any 10% customers in the quarter? And given that the sales and marketing expenses fell drastically sequentially, is that sustainable going forward? And why did that fall so much?

OK, Gus, I'll-- let me take the HSDPA deployment question first. We-- with respect to Cingular in the U.S., they, in our view, have been the most publicly aggressive on deployment of HSDPA. They are on track and have not wavered from their messaging that they're going to have 15 to 20 markets launched by the end of this year and they are very aggressively working with us to get devices to market, as well.

So that appears to be on target and I believe they've also publicly stated that they'll have most of their top 100 markets launched by-- launched by the end of '06.

In Europe, there's a couple of-- a couple of innovators who will also be early, but I think probably a little bit after Cingular. O2, I think, is going to be pretty aggressive with HSDPA. They're going to launch one of their small markets pretty soon, Manx Telecom on the Isle of Man.

Vodafone has already announced that they commenced customer trials and I believe that they've also announced that during the first half of 2006 will have some HSDPA network up and commercially available. And I believe T-Mobile's also announced that they'll have a commercial start on HSDPA starting in early 2006, targeting a launch at the CBIT trade fair.

Orange, as well, in Europe, we do expect them to launch HSDPA in 2006, although they haven't been very specific on what their-- on what their launch dates will be.

I'm sorry, Gus, you had another question.

Is-- your EDGE sales, you said they were down in the quarter.

Yes.

Are they being hurt because of anticipation for HSDPA?

Yes, sales are down for 2 reasons. Number one, Q2 was an exceptionally strong quarter for EDGE sales because we had a bunch of new carrier launches, both in Asia and in Europe. But without a doubt, the HSDPA overhang is going to cannibalize some of our EDGE sales, as well, as we're speaking to some of our current EDGE European customers who have plans to deploy our AirCard 850, so that's going to put the brakes, somewhat, on EDGE sales.

OK.

Gus, it's Dave speaking. You asked about customer concentration. We had-- in the quarter, in the third quarter, we had 2 customers greater than 10% and those 2 customers added up to 40% or contributed 40% of our revenue during the quarter.

With respect to the-- the sequential reduction in sales and marketing costs in Q3 versus Q2, one of the big drivers of that is that in our Q2 sales and marketing, particularly on the marketing side, we-- we had a substantial number of Voq-related people on the product management side that did come out of the cost structure with the restructuring. So that would be one big difference in Q3 over Q2. And we've also just been very careful as we-- as we continue to manage our cost structure.

So is it sustainable? I would say yes, with a caveat that we will-- we will invest as our business grows in sales and marketing activity to support that growth.

John Bucher, Harris Nesbitt.

Jason, I was wondering if you could comment on the differences we might see in distribution channel fill between the OEM modules and the PC cards. It seems that with the carriers there was this initial phase -- there's variations between the carriers, but they were essentially filling their warehouses and also their direct and indirect channels. It would appear with the OEM modules that, I'm guessing, the-- your customers, the laptop/notebook OEMs are most likely to do it on a just-in-time basis, so we're probably not going to see that up front and it'll probably more reflect linearly the actual demand and shipment rate.

Do you think that'll be the case? And are there any other differences that you're anticipating, just in terms of, since, as you pointed out, it's a little bit different relationship since you're not selling directly to the carrier, whether there might be any other changes there?

I think your comments are very insightful. I do expect to see exactly as you outlined. Carriers, when it comes to new product launches often have to gear up their channels for those launches, so they take more product than is equal to the short-term demand in order to make sure they've got everything in place and stocked and can react to any spikes in demand.

And that does differ, in our view, from the way the channel is shaping up with the laptop OEMs. It will be, in my view, a bit more of a just-in-time play, which makes it a bit more of a complex supply chain for us to manage. So we're working through trying to determine how we can get as clear a visibility as we can on demand.

One key difference is that we do get more frequent forecasts from our OEM channels. Since they're used to a just-in-time-- just-in-time environment, we get-- the frequency with which we get forecasts is significantly greater and that's helpful for us to a certain degree in planning out the supply chain.

So we have to watch that carefully and we do have to react, essentially, just in time, John, to what the real end-user demand is for those laptop platforms utilizing wide area wireless.

Any component supply related constraints at this point?

Yes. It's-- and we're seeing that industry-wide and not our-- on any given day, our operations guys, our supply chain guys, are battling parts shortages across a wide range of parts, even in down times. But right now they're having to battle a bit more because overall industry demand does seem to be trending up.

And that ranges from everything to fundamental chipsets to more arcane pieces like SAW filters and the like.

Is that across the board, HSDPA and EVDO and did you mean the base-band processor is in short supply?

No. Well, it is broad-based and I don't want to point to any specific component.

OK. Thank you very much for taking the questions and congratulations on your appointment, Jason.

Thank you, John.

Glen Tracey, Pacific International Securities.

With regard to Vodafone, they have announced that they're going to be live in Australia starting on Monday with HSDPA and indicated they're going to have PC cards that have Mac support. I understand that the 850-860 do not have Mac support. I'm just wondering, how long would it take you to add Mac support into that product?

Well, first of all, Glen, it's-- we have to see that there's enough demand for Mac support for us to launch a development initiative and currently that's not underway. The AirCard 850/860 supports a broad range of Microsoft Windows operating systems and if we see demand emerging, then we'll kick of a development effort to do that. Candidly, I don't know the scope of that development effort, nor how long it would take for us to do it.

OK. With regard to the Q3 numbers, it's great that you exceeded the guidance. I'm just wondering if you can give some idea of what-- what the cause was of the-- of exceeding the guidance. What happened that you didn't expect?

Well, I think, plainly put, the sales of our EVDO PC cards, AirCard 580, were stronger than we anticipated.

OK. Was that across channels or any particular customer?

It was. We've called out 3 specific customers on that, Sprint, Telstra and Renaissance-- and, pardon me, Telecom New Zealand. All had stronger demand than we anticipated when we set guidance.

OK.

We also had an increased contribution in embedded modules, as well, Glen.

OK. With regard to the OpEx, you mentioned, Dave, that there was $400K, approximately of sort of working notice related to the Voq wind-down. Your guidance for Q4 is in line with what the Q3 was. Can you indicate what the cause of that is? And secondarily, I'm just wondering -- there probably isn't any -- but I'm just wondering if there are any CEO-retirement-related costs expected?

Well, if there were, they'd be embedded in our guidance, but no, there's nothing-- there's nothing unusual there.

With respect to the similar guidance level of Q4, we've gone through-- we've gone through the restructuring. We've implemented the measures that we said we would do at the end of the second quarter and you saw the impact of that in our Q3 results. I mean, if you take out the-- if you take out the working notice stuff, that run rate of OpEx in Q3 was about $13.6 million.

We're guiding something a little bit above that for Q4 and recognizing that it's a heavy launch quarter, we've got a lot of significant products coming out the door and there are some costs associated with that, particularly third party costs with respect to certification and the like. So that's why you see the modest increase, but very much focused on keeping that to a minimum.

OK. And with regard to the R&D, it increased fairly significantly from Q3 given that there was a restructuring-- I mean from Q2, rather, given there was a restructuring. Is that, again, related to higher third-party contract costs related to things like certification of equipment and so on?

Yes, it is. And remember, as we march through the development process and get closer and closer to the launch of products you get an intensifying development activity going on and that does drive costs.

OK. Last question. On product, with the 850 and 860, it noticeably has the standard Type-2 form factor with the, apparently removable, antenna, which is considerably different than what it appears that Option and Novatel have with the fairly large sort of attached rugged -- well, maybe rugged's not the right name for it -- but attached embedded antenna.

I'm just wondering if you're getting any feedback from potential channel partners and so on as to their-- whether they have a preference one way or the other or whether it's kind of a moot point what the antenna design is and the final form factor?

It depends on a couple of factors. The whip-style antenna is a high-performance design and for customers who like high performance and for operators who want to show the best performance on their network, they like the design.

And there's also a reliability factor. Most people, when they use these PC cards, they leave it in their laptop and are often rushed when they put their laptops into their computer bag and the unextended design with the whip-style antenna is significantly more reliable in that kind of environment. With a large extension, sometimes users have a tendency to break the extension off as they shove their PC into their PC bag.

So by and by, when all is said and done, I'd say that there are-- there are fans of both form factors. But from a performance and reliability standpoint, people who are focused on those metrics prefer the whip-style antenna.

Because noticeably with EVDO you've got the larger, integrated antenna, right? And you've gone to the-- back to the whip for the HSDPA. Was there a-- was that a performance-related design decision?

Well, part of the reason there is the requirement or non-requirement for diversity. And in EVDO you have a diversity-style antenna. Very often you end up with an extended design. In this first round of HSDPA where there-- where diversity is not supported, you don't have to go with an extended design.

Now, in future versions of HSDPA where there is diversity support, we'll probably be going to an extended design because you need to to put a diversity-style antenna into the card.

OK. Last question. With regard to OEM, the laptop manufacturers and so on, do you expect that some time during Q4 you'll be in a position to publicly announce who your-- your second contract is with and whether or not there'll be any additional that you expect to announce during the quarter?

Well, right now, the goal there is for the-- our customer to launch some time in early 2006 and whether or not they, with us, jointly will be ready to make public-- make a public announcement in Q4 is really TBD. At a minimum, though, you can expect to see some news when the customer is ready to launch in early 2006.

And based on where you are in discussions with other potential laptop customers, would you expect any further announcements with regard to design wins during 2004-- 2005, sorry?

Well, we certainly hope so. I mean, we're-- I mentioned in my summary comments, we're very busy in our business development activities in that area and we're confident that we're going to earn more design wins. And as we do, and as they're disclosable without violating any confidentiality provisions with the customer, we'll announce them.

OK. And just one last comment for you with regard to that-- the Option issue in Cingular. Just so you know, what Option had said is that they expect Cingular to do a hard launch of HSDPA sometime in the February timeframe and at that point they expect to be involved in it. So I'm just giving you that information. You sounded a little bit surprised about Option making any comment with regard to that.

Yeah.

Amy Lamm (ph), J.P. Morgan.

First question regarding gross margins, so an obvious improvement here in the third quarter and the guidance for the fourth quarter, although down sequentially, still looks encouraging. What is the long-term gross margin target we're looking at here? Is this-- are these kinds of levels sustainable?

Dave, you want to take that?

Sure. I think as we see volumes go-- as we see volumes increase we'll have a positive impact on our margin going forward and I think that's going to be somewhat offset by business mix where we would expect that we would see a larger component of embedded module in our mix going forward.

So there's a couple of moving pieces, but I think you'll see gross margin be at or near the levels that we're seeing over the near term, anyway.

OK. Do you think your absence in UMTS in Europe is going to have a significant impact on your ability to gain traction with these carriers as you go into HSDPA?

Well, certainly we do need to re-enter the market place, having-- having not been there with the first generation UMTS cards and having to now return to the market against some incumbents. So absolutely, that is a factor.

Having said that, we're feeling good about our products that we have now and our recharged product line. We are first to market with a true HSDPA card and we also bring a portfolio approach to the market in Europe and North America with the fact that we come hand in hand with some laptop OEMs to sell to the carriers as well as to work with the carriers. So, yes it is a factor to go up against the incumbents, but I think we have some very good tools to do that.

OK. And then my last question. Could you just give me a breakdown of the components for inventory this quarter?

Of the inventory decline?

Well, the finished goods versus work in process, et cetera.

Yes, that's a level of detail that we're just not willing to discuss.

John Bright, Avondale Partners.

Jason, I concur with everyone in giving my congratulations.

Thank you, John.

Jason, now that you're on board, we've seen a lot of talk out there about Option, saw Novatel with some good sales, pardon me, from Ovation, Option's acquisition of Possio. Your thoughts, from a product diversification strategy, what-- looking forward that you bring now with the big hat?

Well, with my somewhat big hat back in June, I feel like I have a lot of authorship in the current plan, which is a refocused plan on mobile-- wide area wireless for mobile computing. So we had a diversification adventure that didn't work out the way we wanted to. So candidly, John, right now we are very focused on wide area wireless for mobile computing. We're going to do that on 2 technology streams, CDMA and HSDPA, and we're going to do it with accessory devices and we're going to do it with embedded modules and that's our current view. I mean-- and that's not to ignore diversification, because wave have to do that.

Now getting to the specific product line, Ovation and whatever Option's now launching, I think that fixed-to-wireless broadband replacement play is interesting and I think there will be demand from some carriers in some regions and we plan to play there, not with our own finished products, but we plan to enable competitors of Option and Novatel and, quite candidly, there are much bigger brands with much stronger distribution channels than Option and Novatel and I-- and who have plans to add wide area wireless capability to their products and we're going to sell them embedded modules to enable them to do that.

Have you been in those types of discussion already?

Yes, we have.

OK. On the-- your headcount, are you down to your 270 target? Are there any headcount-- lowering of headcount that we need to think about, going forward?

We-- John, it's Dave. We ended the quarter at 269, both-- that's employees plus contractors.

OK.

So we-- we certainly did do what we said we'd do in terms of reducing the cost structure there.

All right. And then, 2 last ones. Any-- any desire to give any kind of initial thought on 2006 on a top-line basis?

Low desire, very low desire.

Jeff Kvaal, Lehman Brothers.

I would like to turn our attention a little bit to the EPS line and I'm wondering if you-- if either of you 2 would mind telling us when you think and if you have any projections for EPS break-even revenue levels and when that might be or, perhaps, on a more limited basis, to talk about when you think the OEM module business might reach scale and hit your 10% operating margin target? Thanks.

I don't want to be specific in terms of our target return to profitability, but in general terms a top line of mid-40s, level, Jeff, would be, I think, representative of a turning point and a break-even point there.

OK.

With respect to-- with respect to critical mass on-- on laptop OEM business, it's a new channel to market. It's a new product. We're certainly excited about it being a potentially large opportunity, but we've-- we've got to see how it plays out.

Yes, I'd-- I'll add to that, Jeff, actually, as well. We've got-- there's lot of momentum in that space right now with the carriers and with the laptop OEMs, but both of those parties view putting embedded wide area wireless inside laptop platforms as very strategic. So there's definitely a-- there's a large-- there's a groundswell of push there building and we-- and we believe that are very well positioned to get the early design wins with these laptop OEMs and we've already knocked a couple of them off.

The big unknown, candidly, is how effective that push is going to be and what sell-through is going to be. Now strategically, it makes sense to everybody that it can be a high-growth market, but at this point in time, we just don't know what sell-through is going to be.

OK, and congratulations, both, Jason, to you and also, David, to you, as well.

Thanks, Jeff.

Thank you very much, Jeff, I appreciate that. And I think we're come up on just over an hour now and that's all the time we're going to be able to take for questions so that we can go on to take followup calls. As always, if you want to do a followup call with the company management, it's here and available at 604-231-1100.

Thank you, operator.

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.