司亞樂 (SWIR) 2005 Q4 法說會逐字稿

Thank you for holding for the Sierra Wireless Fourth Quarter Results Conference Call. [Operator Instructions] I'd like to introduce your speakers, Jason Cohenour and Dave McLennan. Please go ahead.

Thanks Vanessa. Good afternoon everyone and thanks for joining the call. I'm Jason Cohenour, President and CEO of Sierra Wireless. And with me is Dave McLennan, our CFO.

Today we're going to review our Q4 2005 results and provide guidance for Q1 2006. The agenda is as follows -- Dave lost the coin toss and will read the forward-looking statements disclaimer. I'll cover business highlights and a product update. Dave will cover Q4 financial performance and Q1 guidance. I'll then sum up the call and open the line for questions. So onto Dave.

Thanks Jason and good afternoon, everyone. This information 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 first quarter of fiscal 2006, 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, profit, and other statements of expectations, intentions, objectives and plans that are not statements of historical fact.

When used in this press release, the words may, plan, expect, believe, intends, anticipates, estimates, predicts and similar expressions generally identify forward-looking statements. Forward-looking statements reflect current expectations, the risks and uncertainties that may affect 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 may not gain commercial acceptance, a reliance on the deployment of next generation networks by major wireless operators and increased competition.

These risk factors and others are discussed in our annual information form, which may be found on SEDAR and in other regulatory findings with the Securities and Exchange Commission in the United States and the provincial securities commission in Canada. These factors should be reviewed carefully and you should not place undue reliance on any forward-looking statements.

Unless otherwise required by applicable securities law, Sierra Wireless disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. Over to you Jason.

Thanks Dave. The fourth quarter of 2005 represented our second consecutive quarter of strong business execution and improving financial metrics, following the restructuring of our business in mid 2005. I believe we have a solid business recovery under way.

During the fourth quarter, we had three first to market product launches. Our HSDPA AirCard for the U.S., our AirCard 860, was the first of its kind launched in the U.S.

Our second HSDPA card, our AirCard 850 was the first fully functional HSDPA PC card launched in Europe. We were also the first company to launch CDMA, EVDO MiniCards for laptop OEMs.

We also grew sales by more than 37% over the third quarter. We had strong gross margins and achieved a modest profit and positive cash flow.

Intense focus on our core PC card and embedded modules businesses is driving this recovery and is strengthening our competitive position in both markets. Markets which we believe have significant growth opportunities.

And while we're pleased with the progress we've made, we also recognize that a lot of hard work and continued strong execution is required before we achieve the goals we have set for ourselves in terms of product line strength, market position and financial results.

Moving to business development, I'll start with activities in our PC card and MP business. During Q4 we completed the development of our first HSDPA PC cards. 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.

In Q4 we became the first company in the world to bring fully functional HSDPA PC cards to market. During Q4 we also had successful launches of our HSDPA PC cards in the U.S. and Europe. We launched the AirCard 860 with Cingular Wireless in the U.S., while in Europe, we launched the AirCard 850 with both [Megs] Telecom, an O2 affiliate based in the U.K., and Sunrise in Switzerland.

We're excited to have a substantially strengthened product lineup with which to compete effectively in Europe. We view our launch of the AirCard 850 as an important first step in what will be a long-term market share battle against established incumbents.

We also continued to make solid progress with our CDMA, EVDO PC Card business with the launch of our AirCard 580 at Tellus Mobility in Canada. We had strong sales of the AirCard 580 to Sprint once again in Q4 and continued to see solid sales of the product in Australia and New Zealand as well.

With respect to new PC cards and MP product initiatives, we have commenced the development of next-generation EVDO and HSDPA PC cards. Our AirCard 595 will support EVDO Rev A capability, while our AirCard 870 will support triband HSDPA capability and speeds of up to 3.6 megabits per second. We expect both products to be commercially available in the second half of 2006.

Additionally, we have projects underway to bring next-generation versions of our rugged mobile, or MP products, to market. We expect to launch two next-generation versions of the MP, one for EVDO and one for HSDPA, later this year.

I'll now provide an update on our OEM business, starting with activity and currently shipping products. With the announcements from several leading laptop manufacturers of their plans to embed 3G wireless wide area capability inside their laptops, the opportunity for sales of embedded modules has potentially increased significantly.

We believe we are well positioned to capture a leading position in this market as a result of our extensive experience in embedding several generations of wide area wireless modules inside mobile computing platforms.

We have design wins with Lenovo and HP for our EVDO PCI Express MiniCard and commenced commercial shipments to Lenovo in the latter part of 2005. Our late September launch with Lenovo represented the first commercial deployment of an embedded 3G wireless MiniCard by any laptop manufacturer, making us, and Lenovo, first to market.

Lenovo has subsequently announced the integration of our EVDO MiniCard into two additional business notebooks. In early January of this year, HP announced the availability of their first notebook incorporating our EVDO MiniCard at the CES show in Las Vegas. Our EVDO MiniCard has been certified for operation on both the Sprint and Verizon networks.

Also during the fourth quarter we ramped up shipments in North America of our EM5625 EVDO module to some of our long time mobile computing OEM customers such as Panasonic. Panasonic has subsequently integrated our EM5625 module into three of its notebook platforms.

With respect to new OEM initiatives, development of our first HSDPA MiniCard modules remains on track for launch in early 2006 and some laptop OEMs have commenced integration activities.

As previously disclosed, we have a design win for HSDPA MiniCards with one of our existing laptop OEM customers. In addition to this win, we have secured another OEM design win for HSDPA MiniCards with a major laptop OEM focused principally on the European market. We expect to announce which OEMs these design wins are with as our customers get closer to launch of their platforms.

We've also commenced development of next-generation EVDO and HSDPA MiniCards. Our EVDO MiniCard will support EVDO Rev A capability while our HSDPA MiniCard will support Triband HSDPA capability and speeds of up to 3.6 megabits per second. We expect both products to be commercially available in the second half of 2006.

Moving to some general comments about the state of our business. Our channels reported solid sell-through of our products in Q4. Bookings in Q4 were strong, as they were in Q3, giving us good visibility to Q1 2006 revenue. Our inventory levels were down in Q4 relative to Q3, reflecting strong demand for our products. Demand for some of our products exceeded our supply capability during the quarter. We expect to build a stronger inventory position for products with strong demand as we move forward.

Also during the quarter we witnessed continued aggressive deployment of high-speed 3G services by many of the world's leading operators. We view this deployment coupled with the associated promotional activities related to high-speed data as an important catalyst for our business. We believe this trend will continue throughout 2006.

Now to Dave to review Q42005 results.

Thanks Jason and before I review the results I would just like to correct a typo in our press release. It's on the income statement incorporated in the press release and specifically the sales and marketing number for the three months ended December 31, 2005, reads on the press release $3,968,000. The last two digits of that number were transposed and -- sorry, the press release reads $3,986,000. The last two digits of that number were transposed as the actual number is $3,968,000. That does not affect any of the other totals or any other number on the income statement. The total OpEx correctly factored in the correct sales and marketing and it was simply a transposition of the numbers on the press release copy. So I apologize for that. But it has no effect on our bottom line or total results.

Moving to those results. Our results are reported in U.S. dollars and are in accordance with U.S. GAAP. For the fourth quarter of 2005, our revenue was $37.6 million. Gross margin was $14.5 million or 38.6%. Operating expenses were 14.6 million, and our net income was $900,000 or positive $0.04 per share.

Our fourth quarter results include a number of non-recurring adjustments as follows. A favorable adjustment gross margin of $1.2 million, or representing 3.2%, the results from the finalization of an intellectual property royalty agreement, the cost of which had previously been accrued for at higher rates.

Approximately $600,000 of write-downs and additional amortization costs of certain patents and licenses are also included in the results. An additional restructuring charge of approximately $300,000 primarily related to a change in the estimate of our facilities restructuring. And finally, a positive recovery of approximately $700,000 from insurance proceeds related to an ongoing legal proceeding.

Results for the fourth quarter of 2005 relative to guidance, originally provided on October 27, 2005, and updated on January 4, 2006, were as follows. Fourth quarter revenue was 37.6 million, in line with our updated guidance of approximately 37 million and better than our original guidance of 32 million.

Gross margin was 38.6%, including nonrecurring items, which had a favorable impact of 3.2%. This was above our guidance of 33%.

Operating expenses were 14.6 million, higher than our guidance of 14 million. Net income of 900,000 or a positive $0.04 per share was better than our guidance of a net loss of 2.9 million or a loss of $0.12 a share.

Cash flow from operations was positive 3.4 million and free cash flow was 1.1 million, consistent with our updated guidance of positive cash flow and better than our original guidance of negative cash flow.

Q4 2000 results compared sequentially to Q3 are as follows. Revenue increased to 37.6 million from 27.5 million in Q3, an increase of 37%. Gross margin was 38.6% compared to 34.9% in Q3. Operating expenses were 14.6 million versus 14 million in Q3. And net income was positive $900,000 or $0.04 per share versus a loss in Q3 of 3.1 million or minus $0.12 per share.

Some of the key drivers behind these numbers, during the quarter, sales of EVDO, Edge and HSDPA PC cards in North America were stronger than expectations at the time of guidance. As well, we had approximately 1 million in sales of [Voq] sales which we had previously written down.

During the quarter Cingular and Sprint each accounted for more than 10% of our revenue. And in aggregate, these two customers represented approximately 42% of our revenue.

Relative to Q3, EVDO and Edge PC card sales were fairly consistent. The growth in revenue came primarily from sales of our new HSDPA PC card in North America and Europe as well as increasing OEM sales.

In addition to the favorable IT royalty settlement, which positively impacted our gross margin during the quarter by 1.2 million or 3.2%, our gross margin was also favorably impacted by a greater mix of higher-margin PC cards as well as higher volume.

During the quarter, our operating expenditures of 14.6 million included some non-recurring items as follows -- approximately $600,000 of write-downs in additional amortization costs of certain patents and licenses, of which 500,000 is recorded in R&D and 100,000 is in amortization. An additional restructuring charge of 300,000 primarily related to a change in estimate of our facilities restructuring, and a positive recovery of approximately $700,000 from insurance proceeds related to an ongoing legal proceeding. This was booked in administration.

Relative to Q3, the growth in our operating expenditures was primarily driven by additional sales and marketing expenses to support the launch of new products.

Looking at the balance sheet compared to September 30th, our cash, short- and long-term investment increased by $1.9 million to $104.1 million at the end of the year. This increase in cash reflects the improvement in our operations, as strong quarter for accounts receivable collection. Inventory levels declined during the quarter from 4.2 million to 3.3 million reflecting continued strong product demand.

Looking at our revenue on a segment basis, firstly revenue by product line, Q4 compared to Q3. In Q4 PC cards represented 68% of revenue or 25.5 million versus 71% or 19.4 million in Q3. OEM was 17% or $6.5 million compared to 11% or $3.1million. Our MP product line was 9% or $3.4 million versus 12% or $3.2 million. Other revenue was 6% in Q4, the same as 6% in Q3. The growth in our core PC card and OEM businesses reflects the positive impact of new product launches during Q4.

Moving to revenue by distribution channel, again Q4 versus Q3, revenue through the carrier channeling in Q4 was 51% versus 52% in Q3. Resellers was 31% versus 34%. OEMs was 18% versus 13%. On a technology basis, revenue from GSM-based products including Edge and HSDPA in Q4 or 47% or $17.6 million versus 31% or $8.5 million in Q3. CDMA was 50% or $18.8 million versus 65% or $17.8 million. And other was 3% in Q4 versus 4% in Q3.

During the fourth quarter, initial sales in HSDPA with our AirCard 860 and 850 added significantly to our GSM based business and we experienced modest growth in our overall CDMA business driven by increased sales of our EVDO embedded modules. Revenue from new products introduced in the last 24 months is as follows -- Q4 was 78%, Q3 was 66% as a comparison.

Revenue by geography -- in the Americas, we saw 74% of our revenue or $27.6 million in Q4 versus 75% or 20.7 million in Q3. EMEA was 14% or $5.4 million compared to 6% or $1.6 million. And Asia-Pacific was 12% or $4.6 million versus 19% or $5.1 million.

Revenue in the Americas was up significantly in the fourth quarter as compared to Q3 driven mainly by sales of our newly launched HSDPA PC card and shipments of new embedded module products. Europe also benefited from sales from our newly launched HSDPA cards together with increased sales of Edge PC cards. Asia-Pacific sales declined modestly. Overall, we expect product channel, technology and geographic segment percentages to fluctuate quarter by quarter based on mix and new product introductions.

Moving to guidance for the first quarter of 2006. We're providing guidance, which reflects our current business indicators and expectations for this period. Inherent in this guidance are risk factors that are described in detail in our regulatory filings. Our actual results could differ materially from the guidance presented. Our guidance for the quarter includes a higher than usual contribution from recently launched and soon to be launched products. There are uncertainties associated with the launch and early ramp of new products that could affect our ability to achieve guidance. All figures are estimates based on management's current beliefs and assumptions, and are subject to change.

We expect Q1 to show sequential revenue growth over the fourth quarter of 2005. Accordingly we are providing financial guidance for Q1 2006 as follows. Revenues of approximately $40 million. Gross margin of 33.5%. Operating expenses before stock option expense of $13.7 million. Stock option expense of $1 million resulting in operating expenses including stock option expense of $14.7 million. This results in a net loss, including stock option expense, of $800,000 or minus $0.03 per share. Excluding stock option expense, net income is expected to be approximately breakeven to slightly positive.

We expect cash flow from operations to be negative during the quarter. And this expectation of negative cash flows reflect the impact of a significant payment during Q1 associated with royalties for past sales as a result of the royalty agreement referenced earlier and a planned increase in inventory for selected products. With that I'd like to turn it over to Jason to sum up.

Thanks Dave. During the fourth quarter of 2005, we saw continued improvement in the financial metrics of our business and continued strong execution on new-product introductions. Revenue for the fourth quarter was up 37% compared to the third quarter, driven by strong sales of our PC cards and new embedded modules. Gross margin was strong in the quarter, assisted by a non-recurring royalty adjustment to cogs. And we managed operating expenses effectively. These factors contributed to a positive net income result and strong cashflow from operations. We completed the development of our HSDPA PC cards on schedule and commenced commercial shipments to Cingular in the U.S. and to European customers, as well, making us the first company in the world to bring fully functional HSDPA PC cards to market.

We had strong execution in our OEM business, as well. We were the first company in the world to bring EVDO MiniCard modules to market with major laptop OEMs. We saw multiple EVDO enabled product platform launches from our laptop OEM customers, including Lenovo, HP and Panasonic, beating our competitors to this key industry milestone by a wide margin.

We believe that we have captured an early leadership position in this strategic and potentially high-growth market. Building on our success in EVDO embedded modules, we have now secured two design wins with major laptop OEMs for our HSDPA MiniCard embedded solutions. We view these wins as critical to our OEM strategy and to strengthening our position in Europe.

Development of our next generation products for both EVDO and HSDPA is well under way and on track for launch in the second half of 2006. Our R&D execution on these programs continues to be strong. Our focus for 2006 is to continue to execute on our new product pipeline and the business development activities related to bringing these new products to market. While we're pleased with the progress we have made, we also recognize that a lot of hard work and continued strong execution is required before we achieve the goals we have set for ourselves in terms of product line strength, market position and financial results.

We continue to tightly manage our operating expenses while being careful not to put key programs at risk as we expect these programs to provide the foundation for continued growth and a return to sustained profitability. I continue to be 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.

I believe we have all the essential elements 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 revenue growth and a return to strong profitability.

With that Vanessa I'll open the line for questions.

Thank you. [Operator instructions] Our first question comes from the line of Amit Kapur of Piper Jaffray. Please proceed with your question.

Great, thanks a lot guys and congratulations on pretty decent guidance.

Thanks Amit.

Thanks Amit.

I just wanted to maybe dig in a little bit more on the HSDPA trends you're seeing at Cingular. Do you have any kind of initial indications as to what the sell through is like? And maybe if you could comment, are we still the stage where you're dealing with channel fill and getting the products out to all the stores? Are you starting to see some of the sell through, pull through the demand as well?

I think it's still a little bit early to get any definitive view on sell through, which, candidly Amit, we probably wouldn't report discretely for Cingular, and to comment on that generally. But I will say Cingular is in the middle of a very aggressive HSDPA rollout, lighting up new markets as they rollout infrastructure. And as new markets get lit up, we think that's a positive impact, clearly, on channel demand. And with respect to sell through, that's going to play out. I mean the reports so far on the service and our card, by the way, are very positive and we're pleased that the early reports from some analysts have our card performing much better than competitive cards and have the Cingular service performing at a level consistent with EVDO. So it's another true broadband play and we think that's going to have a positive impact overall long-term on end user demand.

Great. And maybe just to follow-up on that, maybe you could update us on your thoughts on how you see the competitive environment shaping up for HSDPA both in North America and then how -- your strategy for re-entering Europe.

Well, we're coming from behind in UMTS land, as you know, with respect to our position in the U.S., we're more strongly positioned of course because we've got a legacy relationship with Cingular. They bought and distributed our Edge product for the past 18 months or so. So we've got a naturally strong relationship and channel position there and us being first to market with HSDPA cards was important not only to us but important to Cingular, as well, so that they could launch their service when they wanted to launch it and actually have devices to sell to customers. So with respect to HSDPA PC cards at Cingular, both this generation and next generation, we feel like we're pretty well-positioned and have strong relationship equity to fall back on there.

And with respect to Europe, we've got some early encouraging traction. We saw our sales in Europe bump up, this is the law of small numbers, of course. But our sales in Europe were up about 220%. And that was driven largely by shipments by our new HSDPA cards into European customers. But we're being realistic with respect to Europe. It's going to be a tough market share battle against a couple of well established incumbents, but we're optimistic and we've got pretty good traction with some of our legacy relationships with Europe and some new relationships.

Great. And maybe one final question before turning it over. You kind of mentioned a couple of new products lining up to launch later this year. As you look at the company and the operating expense resources that you have available, do you feel comfortable generally with that level as you approach some of those new product launches?

We do, yes.

Great, thanks a lot.

Okay, thanks Amit.

Our next question comes from the line of Andrew Lee of TD Newcrest. Please proceed with your questions.

Good afternoon guys.

Hi Andrew.

Starting off with the quarter -- because there were some one-time items, have you guys calculated what the EPS would be excluding the gross margin benefit -- excluding those three items on the OpEx? And lastly, whether the Voq phone came through at zero margin or not - I'm sorry, 100% margin or not, 1 million in Voq sales?

Okay, Dave here, Andrew. So the impact on gross margin is $1.2 million or 3.2%.

Right. And was there any -- there's no tax impact to that? I can flow that right to the bottom line to reverse that out?

Yes, that's reasonable to do. The other adjustments that we talked about have a -- would reduce on a net basis a couple hundred thousand dollars in the OpEx line in total.

Right. And then again, tax effect minimal or none?

Yes, because of the size of the number I would just ripple that right through.

Okay and then the Voq please.

The Voq margins were, they were about 30% -- I believe the number was 27%.

Oh, okay, that's good. And Jason, for the initial fee, I understand it's early, the Lenovo, or even talking to the two carriers, have you seen any cannibalization on the PC card business? I imagine the answer is no, but what is your view as that goes through versus your stand-alone PC card business?

We haven't recognized any cannibalization and I think overall the impact of embedded in laptop platforms is going to have the impact of growing the overall pie. And it will, over time, cannibalize share but as the overall aggregate volumes grow. So if we look out to 2008, 2009, our view is that while the market grows, the embedded in laptop market grows faster than PC cards. And at about that time frame, the embedded inside laptops is approximately equal to the volume of PC cards shipped in the market. It takes a few years to get there, though, in our view.

Okay, and the - to understand the design wins you had for HSDPA, one of them is with an existing partner, and you did not say what the geography of that one was, right?

Correct.

And the other one is an European- based OEM?

It's an OEM focused on principally on the European market.

Got you. And looking at what Novatel put out this afternoon do you have any comment with regard to their claim to have at least half of the design wins out there?

No

No comment?

No comment.

Okay. And lastly on the operating model, great to see you get back in the black with about 40 million in revenue, can you just refresh us as to where you think the margins can go to and then again what the long-term pretax operating margins can be?

These are long-term comments Andrew, so this doesn't mean immediately, but certainly gross margin in the low '30's would be the targets. Total OpEx in the low 20s. That would give pretax earnings in around 12% and net earnings of approximately 10%.

Okay. Thank you very much.

Our next question comes from the line of John Bucher of Harris Nesbitt. Please proceed with your question.

Yes, thanks, this is John Bucher, Harris Nesbitt. You mentioned in the last question that you do expect the module mix to grow. Will there be any perceptible impact on margins as that mix becomes more even, as you described?

Well it's going to have -- clearly, the gross margins on embedded modules is lower than the gross margin on PC cards, as we've indicated in the past. But also we see overall volume growing. And so while the mix impact will be negative to gross margin, the volume impact provides a positive to gross margin. So just to reiterate, we view our long-term business model at in and around the 32% on gross margin even with the changing mix.

Then with respect to the revision on the intellectual property licensing agreement you have, can you say whether that was a radio technology license agreement or whether that was some other software or other connectivity? Can you characterize that? And should we expect -- I think you mentioned that we're going to see, if I'm not mistaken, higher costs going forward associated with that. Is there anything else that would be relevant for discussion here?

No, actually, don't expect cogs to go up as a result of that intellectual property agreement. We believe that we, on a forward-looking basis with respect to our guidance and frankly our internal planning, we had the right assumption built in on a forward-looking basis with respect to the IP reserve for this particular IP holder. This particular IP holder is a very large company who has several patents for intellectual -- essential intellectual property in wireless. And it's been an ongoing negotiation. And previously, we were accruing at a higher rate for our past sales. And as the agreement got closer to closure and ultimately closed in December, we had a lower rate on past sales -- royalty rate on past sales than we had been accruing for so we reversed it out. But on a going forward basis we don't view that as an increased tax.

Thank you. Final question, in terms of new business development opportunities, are there other embedded module opportunities that you're looking at besides notebooks that would have comparable total volume opportunity? Anything back in the smart phone area or any other type of opportunity that you're looking at right now?

I mean we -- we're very focused on mobile computing and that's more than just laptop computers. Smart phone opportunities come up from time to time. There are not as many and not as well developed as the laptop opportunities, in our view. And we are seeing opportunities in the router space, as well for incorporating our 3G wireless modules inside. So that's a developing area that we're interested in and have some early customer interest in as well.

Thank you.

Your next question comes from the line of Bev [Bhangui] of Haywood Securities. Please proceed -

How're you doing guys and congratulations on a very good quarter including very good forward-looking guidance as well. Just had a question first in terms of, I guess the carrier traction in Europe. In terms of the press release and [inaudible - accent] comment, Jason, I think less details have been given regarding the possible traction with respect to carriers and PC cards in Europe. Just given the company's marketing relationship with Nokia and T-Mobile, having announced at least three properties going forward with Nokia as well as the kind of the trials in Mansk, with O2 and kind of Telephonica alliance there, what are your thoughts in terms of when will we be able to hear any kind of technology announcements? Is this Nokia alliance helping you out in terms of some of those carriers?

Well, we've been engaged and we have a relationship with Nokia, as you know and as we've announced and that's yielded us some interesting opportunities. I'm not going to comment specifically which opportunities, of course, we're getting any benefit out of with respect to that relationship. But with respect to new announcements and launch announcements of our HSDPA PC cards in Europe, we need to be nailing those down now, and we are. And hopefully in the first and second quarters, you'll see some news flow on that.

Okay. Specifically with respect to the one that was announced in the Philippines, the Globe Telecom, can you confirm or deny that you guys will be the chosen vendors?

I'm sorry, what announcement?

The announcement with respect to a carrier in the Philippines, Globe Telecom.

Yes, we don't have anything to disclose on that.

Okay. Then turning around in terms of, I guess, the 3.6 version of the HSDPA PC card, do you believe that - I mean Sierra has always said that we will always be -- try to be the leader in terms of new business of both the form factors. Do you think having Cingular trial with the 3.6 version of the competitor, are you going to be in a similar position you believe as Cingular moves from 1.8 version to 3.6 version with respect to your relationships?

First I'll comment on the development initiative. I mean, we're going very hard on the 3.6 initiatives. We made it to market first with 1.8. Our goal is to be first to market with 3.6, but we know it's going to be a horse race. We're not overconfident on that, but that's certainly our aim to be first to market again with that next-gen version. And with respect to our relationship with Cingular, I mean, we're confident in our relationship there, I think we've got a good strong relationship. We've supported them extremely well. They recognize that. And we've got -- we've been very busy with them in the sales and marketing side as well in terms of stimulating demand and closing deals. So I'm confident we'll have a very good opportunity there when it comes to 3.6, as well.

Okay, I guess the one reason I asked is because the company believes it will be triband version in both the form factors, that is PC card as well as an embedded module so are there certain frequency bands or certain geographies which are excluded from that?

Well no. When we get to our next generation, it will be a triband UMTS, so it will cover the 2100 megahertz band for UMTS as well as 800 and 1900, so effectively all the global UMTX bands, as well as all four of the global GSM bands. So it becomes a global device. Does that answer your question, Bev?

Yes, thank you. And just in terms of, I guess, Jason you said that you guys are working with some laptop OEMs and have already commenced integration activities. It is that with respect to, I guess, these will be the new laptop OEMs and are these the wins, the potential wins that you might announce with respect to HSDPA? Or HSDPA as well as EDVO and what will be the timing, you think right now that you guys will start shipping the products to some of these new OEMs?

Well, as we've said, we plan to start shipping HSDPA MiniCards in early 2006, and we haven't disclosed specifically when you'll see those -- our laptop partners launch, but count on them being, certainly not past the first half of the year.

Okay. Because, I mean, I just want to distinguish this, you guys have announced two wins and you said during the commentary that there are some additional laptop OEMs which have already started commencement of the integration activities. So while we'll hear about these wins as we go through the following weeks, I'm saying, are you seeing a specific kind of shipping date ahead of you right now? Is it going to be like in Q2, Q3? Or how is that playing out in terms of timing?

No, I think it will be earlier than that.

Okay.

Yes, early 2006 is when we'll commence commercial shipments. Early 2006. I want to make sure I say that correctly, we'll commence commercial shipments. And I think you'll see platform launches from our laptop OEM customers on a similar time frame.

Okay. And a question to Dave, obviously the last one would be, what is going to be your tax rate in '06, Dave?

I think if I was building a model, Bev, I would put in a very low number. We will incur some capital tax and a very small amount of income tax as well.

Towards the end of '06 then?

Sorry?

Towards the end of '06 that that will be a small amount of income tax?

Correct.

Okay, Thank you, guys and all the best.

Thank you. Our next question comes from the line of Amy [Nam] of J.P. Morgan Chase. Please proceed with your question.

Hi gentlemen, it's Amy for Paul [Kosture]. A couple of quick questions. First of all, regarding barriers to entry in the space. Our sense is that they're perhaps not as great as we once thought they were. Verizon spoke this morning about carrying six PC cards. What's your impression, I guess, of the competitive landscape right now and in terms of Sierra specifically being able to differentiate your product in light of so many competitors?

Okay, I hadn't heard anyone carrying six PC cards. But we feel like we're -- I think your ask was about U.S., so specifically with respect to U.S., we have very strong relationships and ship significant revenue to both Cingular and Sprint. They were both 10% customers in the quarter. And with respect to product differentiation, I mean we've already seen one analyst do side-by-side tests of the two available Cingular HSDPA PC cards and I think there's a clear performance difference. And that certainly has been recognized by independent parties and I believe is recognized by other users of the card, as well. And with respect to both of those relationships, we think they're quite strong. Both of those companies recognize not only our product capabilities but also our capabilities in the channel and the strength of our brand, as well, with end user enterprise customers. So we feel pretty good about the way we're positioned and as our product line continues to strengthen, I think that will help us even more.

Okay, In terms of the supply constraint this last quarter, could you give a little bit more color into that? What was, I guess, the positive upside obviously in terms of demand, but what have you done to remedy that situation on a go forward basis?

I think as we indicated in guidance, one of the reasons we're guiding for negative cash flow is we're intending to build inventory. We intended on doing that in Q4 frankly, but demand was a bit stronger than we anticipated and we ended up selling it instead of stocking it. But as we move forward, I think we've got our production capability ramped sufficiently such that we can begin building a stronger inventory position and not leave demand unsatisfied.

So you don't feel that you have any manufacturing constraints on that side then?

No certainly not. From a SMT capability standpoint and from a logistic standpoint, I mean we've got virtually limitless capacity. The challenge on supply chain always is components. And those challenges are daily challenges, right? So on any given day, our ops team is putting out 10 or 15 different fires and the next day it will be a different 10 or 15 components and that's just because world wide demand is quite strong and we're just battling to get components in. So -- but I think we've got our supply chain revved up appropriately. And I think we've got our purchases on the supply chain sized appropriately so that we minimize any unsatisfied demand.

Okay and then real quickly, housekeeping, Dave -- in terms of any remaining Voq related revenues, so it was 1 million this last quarter, how should we think about that going into '06?

We continue to have a small quantity of Voq product. We did write it down at the end of second quarter 2005. So going forward, if there are sales, it would be pretty minimalistic.

Okay. Thank you.

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

Thanks. First a couple of clarification questions on the guidance. Dave, the stock compensation of $1 million in Q1 -- is that something you expect to continue to see as you go through 2006, or how should we model that?

I think that's a pretty representative number, Glen. I think using that number would not be a bad proxy.

And as you were developing this guidance for Q1, looking back to Q4, you originally had guidance of 32 million, you exceeded that by over 5 million. Granted, there was about 1 million of Voq sales in there. So I'm just wondering with regard to your sort of perspective on Q1 guidance, did you go at it basically the same way as you looked at it from Q4 in terms of your rationalizing the opportunity versus what you're going to give as guidance, would you say it's the same sort of level of conservatism that you're taking a look at Q1?

When we set guidance, Glen, we try to set guidance such that it actually at the end of the quarter is the number we achieve. With respect to Q4 guidance, we said as we gave the guidance then, that we had some significant risks and uncertainties with respect to new product launches. It was a big new product launch quarter for us. And that had risks to the downside, it also had risks to the upside, right?

Yes.

And as it played out, particularly with respect to HSDPA PC cards, we were able to complete those products right on schedule, which rarely happens, but we completed them right on schedule and were able to ramp manufacturing very quickly and get product shipped out. And that's really where the upside came from.

So while we are reliant in Q1, as well, on some new products, we're not in as an aggressive brand new product launch cycle. So we're not launching, as an example, a brand new PC card in Q1. So we have a little bit more predictability. We are going to be launching new MiniCards. So I think we have a little more predictability as we go into Q1, and I think we're also going to be in a little bit of a stronger inventory position, as well.

Okay, thanks for the clarification there. With regard to laptop vendors and the opportunities that you have there, you indicated that you would talk about who those customers are as they get closer to launch. Have these customers -- are you waiting for these customers to make a public announcement about the fact that they are going to launch a product? Or is it a matter of they have announced already and you're waiting to get closer so that they give you approval that you can talk about it and the design from their perspectives complete and ready to go?

Yes. With respect to disclosing who the OEMs are, we withhold the names of the OEMs out of respect for the OEMs' own publicity plans. And typically the OEMs want to -they're shy about disclosing any specific launch plans or partnerships before they're materially down the path on development. So as we saw with some of our previous customers, it's actually quite close to launch of the laptop PC where disclosure of availability and who their partner with occurs. And with these more recent design wins, I see us going through the same publicity schedule.

Okay. And last question, with regard to your activities in EMEA, you've indicated that obviously it's going to be a long battle with incumbents there. Can you talk a little bit about what your strategy is, how you're going about trying to break back into the EMEA market and how you're working at developing these relationships with the carriers to get design wins? What additional efforts are you having to put -- what additional infrastructure are you having to put in place in order to be able to achieve this?

Well you know we started -- when we first started our HSDPA development efforts, we first off decided to layer in some beefed up certification resources. So that's been - you've seen that in our Engineering OpEx now for few quarters. That was a big part of our get to market fast plan. And certification resources particularly at the end of the development cycle and leading up to launch are vital. So I think we're quite strong in that area, so that has helped us plow through some regulatory and carrier certification activities faster than our competitors. That's one key thing. And then the other key thing is, and I think we've mentioned it before, we did a, in June, we did a bit of a restructuring of our European sales and marketing team too. And really restructured that team to make it more Continental Europe focused. So we've hired -- we let some people go in June, and we've rehired new people in Germany and Italy and France. And that's getting as close to the customers and gives us better capability to build relationships with the key operator groups in their countries and speaking the same language. And I think that's quite important.

Were you actually able to hire anybody from the carriers to act on your behalf? Basically buying a Rolodex of contacts within the various carriers to be able to break in as opposed to having to develop new rapport?

Well we're not in a position to disclose where we hired our guys from. But --

No, but just in general terms, I'm just trying to understand how you went about it. These --

In general terms, I mean, when we hire for those positions, we always look for people who have relationships with our target customers. It's one of the key hiring criteria. And sometimes you're successful in getting sales people that have a great Rolodex, and sometimes you hire salespeople who instead have great skills and leverage our existing contacts.

Okay. Thanks very much.

Our next question comes from the line of Nick Agostino. Please proceed with your question.

Hi guys, I just want to also congratulate you on a good quarter and good guidance.

Thanks Nick.

So I just -- one question, just a quick one. Can you guys talk about the pricing environment in the, I guess, in the EVDO space, given that there is a new entrant with Sprint? And also what your expectations are for the pricing environments in HSDPA going into Q1. Should another supplier emerge at Cingular?

Well the pricing environment -- I think we've characterized the pricing environment as intense before, and it continues to be intense in both technologies. And so I expect that's going to continue through this generation of HSDPA and EVDO and into the next. So our job is to be competitive on price and win the deals and be competitive on cost and make a good margin and get our products to market before our competitors and support our customers better.

Has the -- I think last quarter if I'm not mistaken you were suggesting that the EVDO price environment was somewhat stable. Has that -- I guess you're saying it hasn't changed.

It is about the same. Competition continues to be intense and our ASPs have held up.

Okay, thanks.

Sure

Thank you. Our next question comes from the line of Deepak Chopra of National Bank Financial. Please proceed with your question.

Good quarter, guys.

Thanks Deepak.

I'll be quick here. Could you talk about the book to bill or what your backlog is entering this quarter? And if you can't be specific, maybe just qualitatively?

Yes, we don't disclose book-to-bill and we don't disclose backlog, but qualitatively bookings were strong. And they were strong in Q3, as well and we've got good visibility into Q1 revenue.

And typically, is it 30, 60 days lead time you want from your customers in terms of the PC card business? Can you help us understand the buying cycle a little bit better?

Sure. Well, typically what we try to do is get a six-month -- on the PC card side we try to get a six-month rolling forecast from our customers. And generally we're successful getting that. Not always. And then we build the forecast. So our goal is to meet our customers' forecast so that they can put POs on us 30 or 60 days in advance and we're able to meet that demand.

Okay, that's all. Thank you very much.

Sure. Operator, we'll take one more question.

Okay perfect, just a moment. Our next question comes from Jeff Kvaal of Lehman brothers. Please proceed with your question.

Yes, Thanks very much. You folks have done well being the -- coming to market first with a new technology, in the past, that has led to some fluctuations as market share changes in those channels. So, I'm wondering if, A) that situation may repeat itself - to what extent competition may be a threat for you at both Sprint and Cingular over the next several quarters. And then the second part of that is do you think that Verizon - you'll have an opportunity to regain share with Verizon with the DO Rev A Card in the second half of the year?

Well, Jeff thanks for making it just under the wire, by the way.

Well, we're delighted to be here.

Competition at Sprint is nothing new. I mean there has been a third provider who's just entered there, but we've been competing -- we haven't been alone in that channel. And we've still managed to keep strong share there, and we've got a very strong relationship, they were a strong contributor to our Q4 revenue so I think we're competing pretty effectively there. And so our job is to make sure history doesn't repeat itself, like what happened with us at Verizon at the start of 2005.

And I think we've learned some lessons there, learned how to do some things a bit better. And as I said earlier, while we expect competition to enter the Cingular channel, we're confident in our position with them. We're confident in our position with respect to the products and planned products. And I think as long as we do the right things, we'll capture good, strong share there. So we're working hard to make sure history doesn't repeat itself, and I'm pretty confident it won't.

And then with respect to Verizon, Verizon continues to be a customer. They're not a big customer of ours, but we did get new orders from Verizon again during Q4 and we shipped against those in Q4. They weren't a 10% customer, but they were an important customer. And I do think with respect to capturing more share than we have there, our chances of doing that are greatly improved as we get closer to a Rev A PC card launch.

Wonderful. Thanks very much.

Thanks Jeff.

There are no further questions at this time. I'll now turn it back to you.

Okay, thanks very much operator. And thank you to everybody for joining the call. As always, management is here in the office and available to take your calls if you have additional questions. Thanks very much.

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