司亞樂 (SWIR) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Sierra Wireless Inc. fourth quarter 2006 results conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS]

I'll now turn the conference over to Jason Cohenour, President and Chief Executive Officer. Mr. Cohenour, please go ahead.

Thank you John, and good afternoon, everybody and thanks for joining today's call. Today we'll be discussing our Q4 and full-year 2006 results, as well as our Q1 2007 guidance.

Joining me today on the call is Dave McLennan, our CFO. The agenda for today's call is, Dave will have the honors of reading the forward-looking statements disclaimer. I'll then provide a business update. Dave will then provide an overview of Q4 and full-year 2006 financial performance, as well as Q1 2007 financial guidance. I'll do a summary and then we'll open the line for questions. With that, I'm going to pass it to Dave.

Thanks Jason, and good afternoon everyone. Our forward-looking statements disclaimer is as follows. Certain statements on this conference call that are not based on historical facts, constitute forward-looking statements or forward-looking information within the meaning of the applicable securities laws.

These forward-looking statements are not promises or guarantees of future performance, but are only predictions that relate to future events, conditions or circumstances, or our future results, performance, achievements or developments, and are subject to substantial known and unknown risks, assumptions, uncertainties and other factors that could cause our actual results, performance, achievements, or developments in our business or in our industry to differ materially from those expressed, anticipated, or implied by such forward-looking statements.

Forward-looking statements include all financial guidance for the first quarter of 2007, and disclosure regarding possible events, conditions, circumstances, or results of operations that are based on assumptions about future economic conditions, courses of action, and other future events. We caution you not to place undue reliance upon any forward-looking statements, which speak only as of the date they are made.

These forward-looking statements appear in a number of different places and could be identified by words such as may, estimates, projects, expects, intends, believes, plans, anticipates, or their negatives or other comparable words. Forward-looking statements include statements regarding the outlook for our future operations, plans and timing for the introduction or enhancement of our services and products, statements concerning strategies or developments, statements about future market conditions, supply conditions, end-customer demand conditions, channel inventory and sell-through, revenue, gross margin, operating expenses, profits, and forecasts of future costs and expenditures as well as, statements about the outcome of legal proceedings and other expectations, intentions, and plans that are not historical fact.

The risk factors and uncertainties that may affect our actual results, performance, achievements, or developments are many and include amongst others, our ability to develop, manufacture, supply, and market new products that we do not produce today that may meet the needs of the customers and gain commercial acceptance, our reliance on the deployment of next generation networks by major wireless operators, the continuous commitment of our customers, and increased competition.

These risk factors and others are discussed in our annual information form which may be found on SEDAR at www.sedar.com and in our other regulatory filings with the Securities and Exchange Commission in the United States and the Provincial Securities Commissions in Canada.

Many of these factors and uncertainties are beyond the control of the Company. Consequently, all forward-looking statements on this conference call are qualified by this cautionary statement and there can be no assurance that actual results, performance, achievements, or developments anticipated by the Company will be realized.

Forward-looking statements are based on management's current plans, estimates, projections, beliefs, and opinions, and the Company does not undertake any obligation to update forward-looking statements should the assumptions related to these plans, estimates, projections, beliefs, and opinions change.

Thank you, Dave. On to a business overview. The fourth quarter of 2006 was a period of record revenue, improving profitability, continued global channel expansion and strong OEM design win activity.

During the quarter, we had record revenue of $68.3 million, representing an 82% increase over Q4 of 2005. Our strong top-line growth helped to drive improved net earnings of $2.4 million compared to $900,000 in Q4 of 2005.

We continued to expand our base of global channels, announcing new AirCard launches with key wireless operators in the US, Canada, Europe and Asia. We also continue to drive strong OEM design win activities and now have embedded module design wins with 10 PC OEMs. Six of our PC OEMs now have products in the market with Sierra Wireless modules inside, representing 38 notebook platform and AirLink combinations. These notebook platforms have been certified and launched on 3G networks around the world.

We expect that our current momentum, combined with continued new product releases, will drive considerable revenue growth and improving profitability in 2007.

Moving to specific updates on our product lines, I'll start with our AirCard NMT business. AirCard sales were up approximately 33% compared to Q3 of 2006 and up 89% compared to Q4 of 2005. The sequential increase in AirCard revenue was driven primarily by strong sales of our new 3.6 HSDPA AirCards and EV-DO Rev A AirCards.

In North America, we believe that we continue to have a very strong channel position at Cingular with our AirCard 875. In addition, we began commercial shipments of our AirCard 595 to Verizon and continued solid shipments of this product to Sprint as well.

In Europe, our revenue increased 124% compared to Q3 of 2006. Our channel position in Europe continue to improve, with the selection of our AirCard 850 by Orange UK, O2 in the UK, Bouygues Telecom of France. And during the quarter, we also commenced shipments of our new AirCard 875 to Telefonica, in Spain.

Overall, our revenue in Europe tripled during 2006 compared to 2005, to over $38 million. By the end of the year, we were supplying our HSDPA AirCards to Debitel in Germany, Bouygues and Orange in France, O2 and Orange in the UK, Swisscomm and Sunrise in Switzerland, Telefonica in Spain and to other operators in the region.

In Asia Pacific, we commenced shipments of our AirCard 875 to Telstra in Australia and our AirCard 595 to Telecom New Zealand. Telecom New Zealand represented the first launch of the AirCard 595 outside of the United States.

Overall, our AirCard products are now approved on 35 networks around the world.

Sales of our rugged MP products were down 15% sequentially compared to Q3 and down 66% compared to Q4 of 2005. As expected, revenue contribution from the MP product line has been modest, as we complete development of our first 3G MP products.

We expect our new MP 595 for Rev A networks and MP 875 for HSDPA to be in carrier certification and commercially available by the end of the first quarter of 2007. One this product line is fully refreshed, we expect it to return to being a consistent contributor of high gross margin revenue.

Our Express Card product line was introduced in Q3 of 2006, with the announcement of the AirCard 597e for Rev A networks. We expect the AirCard 597e to be in carrier certification and commercially available by the end of the first quarter. Express Card AirCards for HSDPA networks are expected to follow later in 2007.

Our AirCard USB wireless modems for EV-DO Rev A and HSDPA networks were also introduced in Q3 2006. We expect to commence commercial shipments of both the AirCard 595u for Rev A networks and the AirCard 875u for HSDPA, late in the first quarter of 2007. We have now secured purchase commitments for these products from major operators.

Moving to specific business development highlights in our OEM business. Sales of our embedded modules were up 21% compared to Q3 and up 156% compared to Q4 of 2005. About 63% of our OEM sales came from PC OEMs and the balance from our traditional non-PC OEMs.

Our sequential revenue increase in this segment was driven primarily by sales of our new 3.6 HSDPA minicards and our new EV-DO Rev A minicards. During the quarter, HP launched their NC6400 notebook computer with our MC 8775 inside. That's for HSDPA networks, while Digi International introduced the industry's first commercial grade EV-DO Rev A wireless wide area router, featuring our MC 5725 embedded module.

We secured design wins with three new PC OEM customers, including Dialogue, for their Flybook like of ultra portable notebook computers. Two of our design wins are targeted specifically for the Japanese market.

In addition to these three new customer wins, we have been awarded next generation design wins with three of our existing PC OEM customers.

In total, we now have 10 PC OEM customers, including Lenovo, HP, Fujitsu-Siemens, Panasonic, ASUSTeK, Dialogue and Itronix. Six of our PC OEM customers currently have commercially available products featuring our 3G embedded module solutions, representing approximately 38 distinct platform and airlink combinations.

We believe that we have established a strong leadership position in this strategic market segment.

On to some general comments. During the quarter we continued to witness accelerating deployment of high-speed 3G networks around the world. We've used such deployments, coupled with the anticipated aggressive promotional activities, as important growth catalysts for our business. Our bookings during Q4 were considerably stronger than in Q3, giving us good visibility to Q1 2007 revenue.

Our channels also reported strong sell-through during the quarter.

We continued to experience some gross margin compression during Q4, driven by higher initial product costs on new AirCards in embedded modules, lower sales of higher margin products, and some sell-off of legacy products.

In response, we are focused on driving continued growth, reducing product cost, closely managing our operating expenses and adding new higher-margin products and services to our lineup, such as our 3G MP.

Overall, we're very pleased with our Q4 and full-year 2006 results and believe that our position in the market has improved significantly since the start of 2006. We believe that our strong new product and business development execution is driving our improving results and we believe that we are well positioned for considerable revenue growth and improving profitability in 2007.

I'll pass it over to Dave for the Q4 financial results.

Thanks Jason. Our results are reported in US dollars and are in accordance with US GAAP. For the fourth quarter of 2006, our revenue was a record $68.3 million. Gross margin was $178 million or 26% of revenue. And our net earnings were $2.4 million or $0.09 per diluted share..

Our net earnings include stock-based compensation expense of $1 million, of which $100,000 of this is included in cost of goods sold with the balance of $900,000 in operating expenditures. Net earnings also include a $500,000 foreign exchange gain.

During Q4, we realized $5.8 million of cash from operating activities. At the end of Q4, our cash balance was $87 million and inventory was at $18.9 million.

Relative to the guidance we provided for the fourth quarter, revenue of $68.3 million was better than our guidance of $66 million and net earnings of $2.4 million or $0.09 a share was better than our guidance of $1.7 million or $0.07.

Looking at our Q4 results compared sequentially to adjusted Q3 results and the adjustment here to Q3 is to exclude the net positive royalty and inventory adjustment of $700,000 in Q3. Revenue increased by 30% to $68.3 million from $52.5 million in Q3. This is driven by ramping sales of our new HSDPA and EV-DO Rev A AirCards.

During the quarter, Cingular and Verizon each accounted for more than 10% of our revenue, and in aggregate, these two customers represented approximately 37% of our revenue. This represents an improvement in customer concentration compared to Q3, where 48% of our revenue came from our top two customers.

Gross margin decreased to 26% compared to an adjusted 28.9% in Q3. This reflects lower margin on our newer products as a result of the higher bill of materials for these new products, and startup costs associated with the ramp of these new products. We also sold off some legacy product inventory, which negatively impacted gross margin in the quarter.

Operating expenses

Results for the fourth quarter 2006 excluding the royalty and inventory adjustment of $700,000 relative to guidance provided in July were as follows. Fourth quarter revenue was $52.5 million, better than our guidance of $51 million. Gross margin was 28.9% less than our guidance of 31%. Operating expenses including stock-based compensation expense were $15.8 million better than our guidance of 16.9 million.

Operating expenses increased to $16.4 million from $15.8 million in Q3. This was driven by increased sales and marketing expenses as we grow our business. Earnings from operations increased to 1.4 million from an adjusted loss of 600,000 in Q3 and net earnings increased to 2.4 million or $0.09 per share from an adjusted 0.4 million or $0.01 per share in Q3.

Looking at the balance sheet compared to September 30th, our cash and short-term investment balance was $87 million compared to $94.1 million at the end of Q3. The decrease in cash was partly the result of a sizeable royalty payment made during the quarter. Accounts receivable increased to $57.4 million from $39.1 million in Q3. This increase is due to large shipments of our new products late in the quarter. Accounts receivable DSOs were 62 days at the end of Q4 compared to 60 days at the end of Q3.

Inventory decreased during the quarter to $18.9 million from $28 million at the end of Q3. This decrease was driven by sales of HSDPA and legacy product inventory.

On a full-year basis 2006 compared to 2005, some adjustments need to be made in order to make these numbers comparable. These adjustments exclude restructuring and other charges from 2005 and stock compensation expense in 2006.

On this basis, revenue increased 107% to $221.3 million from $107.1 million in 2005. Adjusted gross margin decreased to 31.4% compared to 35.4% in 2005. Adjusted operating expenses increased modestly from $60.2 million from $58.7 million in 2005. This really illustrates some good operating model leverage. We essentially doubled the size of the Company in 2006 and only added $1.5 million of OpEx.

Adjusted net earnings for 2006 increased to $13.6 million for diluted earnings per share of $0.53 compared to an adjusted net loss of $17 million or a loss per share of $0.67 in 2005.

Looking at revenue by product line, in the fourth quarter of '06, revenue from PC cards was $48.1 million. That's 70% of our quarterly revenue and represents a 33% increase from Q3.

Revenue from our OEM category was $16.5 million, accounting for 24% of our revenue and that represents a 21% increase over Q3. Within the $16.5 million of total OEM revenue, there is approximately $10.4 million of sales to PC OEMs.

Revenue from our rugged mobiles product line was $1.2 million in Q4, that's 2% of revenues and that was down 15% from Q3. And we had $2.5 million or 4% of our revenues from other.

Looking at revenue by geography, in the fourth quarter, revenue from the Americas was $37.2 million or 54% of our revenues and that represents a 10% increase from Q3. Revenue from Europe was $16.1 million or 24% of revenue and that represents a 124% increase over Q3. And revenue from the Asia Pacific region was $15 million or 22% of revenues and that represents a 31% increase over Q3.

The 10% increase in sequential sales in the Americas is a result of strong sales of our AirCard products to Cingular and Verizon. On an annual basis, sales were up 91% in the Americas compared to 2005.

The 124% increase in sequential sales to Europe was driven by continued strong channel expansion in the region and several new HSDPA AirCard launches. We are now shipping HSDPA AirCards to two carriers in each of France, Spain, Switzerland and the UK. On an annual basis, sales were up 209% in Europe compared to 2005.

Finally, the 31% increase in sequential sales in the Asia Pacific region is a result of increased embedded module sales to OEM customers, as well as AirCard sales to Telsa in Australia. On an annual basis, Asia Pac sales grew 100% compared to 2005.

On to guidance. We're providing financial guidance for the first quarter ending March 31st, 2007. This guidance 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 the guidance presented. All figures are estimates based on Management's current beliefs and assumptions and are subject to change.

Our guidance for Q1 2007 is for revenue of $82 million. That's a 20% sequential increase from Q4. Earnings from operations of $2.5 million. That's a 70% sequential increase from Q4. And net earnings of $3 million, or $0.12 a share. The $3 million net income figure is a 25% sequential increase from Q4.

This guidance includes approximately $1 million of stock-based compensation expense. Based on strong bookings, we have solid visibility on revenue in this quarter. This guidance also includes a sizeable increase in operating expenses relative to Q4, related to expected certification costs associated with new product launches and cost associated with major trade show activity in the first quarter.

With that, I'll turn it back to you, Jason, to summarize.

Thanks, Dave. So in summary, Q4 of 2006 and the full-year 2006 were periods of strong growth and record revenue. For the year, we grew revenue by 107% to a record high of $221 million.

While executing on this strong growth, we were also able to swing the Company from a deep loss position in 2005, back to profitability in 2006. During the year, we launched eight new products, compared to four in 2005, while keeping our operating expenses roughly the same.

We expect this aggressive new product development pace will continue to accelerate into 2007, as it is an important factor in driving our growth. We have significantly expanded our global channels for AirCards. During the year, we added important operator channels like Verizon, Orange, O2 and Telefonica, while also solidifying our position with key existing customers such as Cingular, Sprint and Telstra.

We've also considerably expanded our OEM channels. We continue to grow our relationships with some of the biggest names in the laptop business, such as HP and Lenovo, while adding several more customers to our roster, bringing our PC OEM customer total to 10.

We believe that the embedded laptop segment is strategically important and that we have established a strong leadership position.

While growing this segment of our OEM business, we also saw continued solid contribution from our legacy OEM customers and emerging opportunities in the fixed wireless space, where we have earned a number of design wins.

We believe that our market of wide area wireless for mobile computing continues to experience a strong rate of growth. Wireless operators around the world are continuing to deploy new high-speed 3G services in their markets. We believe that these deployments, combined with aggressive promotions of these services will continue to drive accelerating end-user adoption of devices such as those made my us.

This market growth is also driving a business model transition for us and others in our industry. We believe that our market is transitioning from a niche low volume segment to a mainstream high volume segment. This environment means strong revenue growth for those players who execute and also intensifying competition.

We believe that we are effectively managing this business transition by driving growth, closely managing operating expenses and adding new high-gross margin products to our mix, such as our 3G rugged mobiles.

Overall, we believe that our expanded roster of channels, rejuvenated product line and solid business execution, combined with continued strong market growth, have us well-positioned to drive considerable revenue growth and improving profitability in 2007.

With that, John, I'll open the line for questions.

[OPERATOR INSTRUCTIONS] Gus Papageorgiou of Scotia Capital.

Dave, a couple of questions for you. On the working capital, your receivables and your payables ate up a lot of cash in the quarter and I'm just looking at your receivable days and they seem to be escalating. I'm just wondering, can you tell me what's going on there and what are the chances that you get those receivable days back down, so you can kind of get some cash out of those accounts?

You're right, Gus, as we grow our business we will consume some cash, and we're watching that carefully. We used about $5.8 million of cash from operations in the quarter. With respect to DSOs, our customer profiles are different by geographic region and we tend to see our North American customers pay much faster than European or Asian customers. So as we grow our business outside of North America, you should expect that our days outstanding will bubble up.

So should I assume that it's pretty stable now or is it going to kind of trend up or down?

We're hovering around the 60 days is where we certainly are trying to manage it. So I think we're revolving around the number where we are right now.

Okay. And on gross margin, I know you don't give gross margin guidance specifically, but could you give me, directionally, are we kind of flat, slightly up, slightly down, in the same range going into the next quarter?

We're kind of bumping around the mid 20s right now and it's hard to predict exactly where we're going to go from here.

I will say, Gus, I'll add to that. We do have visibility to cost improvements that flow into the business model, starting in Q2 and this is very typical that you have lower cost of goods sold as you start the new year, but then it takes a quarter for that to actually impact the P&L, because you've got to sell-through inventory and previously committed to [width]. So we do have visibility to cost relief. Our job is then going to be to make sure we manage ASP very well in order to have any improvement in gross margin.

And I think right now we'd characterize gross margin as stabilized, with some visibility to cost release, but we've got a lot of work to do on managing ASP and bringing our higher gross margin products into the mix.

Mike Walkley of Piper Jaffray.

I was wondering if you guys would consider maybe giving operating margin longer-term targets versus gross margin targets, given maybe the change in the mix? You've done a great job managing your operating margin costs, but it seems that gross margin is a little more out of your control in the short-term.

Is that a question, Mike?

Yes, just a question if you had some operating margin targets longer-term, that might be helpful just to think about the long-term business model for you guys.

We do. We haven't stepped away from our long-term business model goal of getting to 10% operating margins. No doubt we've got some work to do here. That's going to take growth. It is going to take improvement in gross margin as well. And of course, continued good control over OpEx. But long-term, that's the goal for this Company, to get to 10%, with a lot of work in front of us to get there.

Okay, great. And then just maybe switching back to the gross margin. You talked a little bit about it and feel material maybe relief coming into Q2. Is there any tightness in components starting off the year with the 3G ramp out there or is that pretty good visibility for you guys?

I think we feel pretty good about parts availability. We've been pretty aggressive in placing forward commitments, given the demand we see bubbling up. So, we've been getting our orders in early enough.

There are always fire drills on certain components and those certain components, they seem to change weekly. Memory one week and it's chips the next and its shields the week after that. So that's just kind of the--we just have to manage that. That's blocking and tackling stuff.

We don't see anything systemic with respect to shortages of specific components that's affecting our supply chain right now.

Okay, great. And then just a couple of quick questions for you, Dave. Could you give us the operating line items of stock-based compensation and can you also give us the revenue mix between HSDPA and CDMA or GSM and CDMA?

I sure can. You want it on an annual basis for stock-based comp or just the quarter?

Just the quarter would be great.

Okay, so $1 million for Q4; $100,000 in cost of goods sold; $100,000 in sales and marketing; $200,000 in R&D; and $600,000 in Admin. And sorry, your second question was a technology split?

Yes, just the GSM roadmap versus the CDMA roadmap.

Sure. In the fourth quarter, GSM products contributed 62% of revenue; CDMA 34%; and Other 4%.

Great. And then one last question. Just on the OpEx, was that something we should expect to go down in absolute dollars after Q1 post all these industry conferences or with the certification of that PC, should we consider kind of flatlining at that little higher level into 2007?

I don't want to get outside of the guidance box, but things that drive our OpEx that are sort of outside an third party would be things like certification costs. So we've got a fairly aggressive product launch schedule ahead of us in the first half of 2007.

Okay, that's helpful. Congratulations on the strong revenue growth.

Dev Bhangui of Haywood Securities.

Congratulations for exceeding the guidance of Q4. Just quick question earlier in terms of the fact that Dave, you were talking about the fact that the GM was 26% in the quarter that went by, [inaudible - accented] cost and so on and that there will be some cost efficiencies realized. Are these cost efficiencies are going to be realized above the GM line or below the GM line?

It was a product cost comment and that's related to cost of components coming down, going into Q2.

Okay. And obviously, just in terms of the original new product releases and so on, do you expect the same figure of 8.8 million quarter [inaudible] to go up as well in Q1?

Given we've got some significant launch plans in the quarter that bring with it certification costs, yes.

Okay. Now, one thing that I didn't understand very well was administration just went up significantly. What is included in that increase? There was an increase of $600,000 in terms of divestments on options. But if you see, based on that annualized, 10.8 versus 12.8 on administration, I think most of that 2 million increase on an annualized basis just was in Q4.

If you look at our quarterly run rate, Q4 was 3.4, so we were fairly flat--sorry, Q3 was 3.4, so we were fairly flat quarter on quarter, on a run rate basis.

Okay. Jason, you were talking about the shipping to Isistek and also the new wins that Sierra has secured in Japan. Can you give us some kind of color as to what the shipping date to these two new wins will be? Like Isistek as well as the Japanese OEMs?

I think I mentioned there were three new customer wins. We have commenced shipment on one of those customers already and the other two, some time this year is about as good a guidance I can give you on that, Dev.

Okay. In terms of the margin for Q1, I mean I don't want to get into any kind of numbers, but I guess there appears to be a significant potential to improve and go beyond 26%, which is what the Company has reported for Q4. Though I know that you've been talking about bouncing around the mid 20s. There appears to be, because obviously the EM line is going to come on and I do not know how many points of impact it's going to make approximately. You and [inaudible] the companies has gone up. But that plus obviously the higher bond costs are going to go down and also the television costs are going to stabilize. Does it not appear that there is a significant opportunity there in terms of going about the 26%?

We're not giving gross margin guidance in the current quarter. I would characterize it as stabilized. And we have visibility beyond Q1 of product cost reductions that could result in better gross margins. We have lower costs, but we have to do the job on price in order to get a better gross margin percentage--.

Okay--.

A little bit there, because you know how our market's been moving. The other positive thing in our favor in Q2 is we'll have 3GMP revenue begin to come back into the model. I think the 3GMP revenue in Q2 will be at full strength. I think we have to look to the second half to have full strength MP revenue in the P&L. So we've got a couple of positive factors and we need to combat the ASP thing.

And full strength, you mean it is going to be either equal to or higher than what the Company has experienced in the steady-state conditions for the MP, in the past?

I'm sorry, can you repeat that?

I'm saying, when you say full strength, you are talking about equal to or higher than what the Company has experienced in terms of the MP revenues in the steady-state conditions [inaudible] right?

Roughly equal.

Okay. And one last question for Dave. If you can just give us an idea about the tax rate and IP adjustment if any, going into Q1?

Taxes, we were 22-ish percent in Q4 and I would say model for '07 would be in that area as well would be a representative number.

Okay. And any kind of IP adjustments or that is not know at this time?

You're talking about going forward? No. We just can't predict those things.

Okay. Thanks a lot for taking my questions and all the best.

Mike Abramsky of RBC Capital Markets.

Could you just perhaps give us some idea of how sustainable you see the sell-ins for the top two carriers that are driving the growth rate now? How long do you see the rollouts continuing for, say, Cingular and Verizon and what's going to take up the slack when those are complete?

I'm not sure if I really understand that. I mean, the deployment, Mike, and lighting up of new networks definitely has a positive impact. I think that's what you're referring to--to growing the market and having more available users to sell product to.

You know, in addition to that, we believe that the market has growth beyond just new markets that light up with new 3G service. Awareness is getting better. Speeds are definitely better. Promotion is aggressive. And penetration today is very very low. So I think when a network gets "fully deployed" that shouldn't mean--at least we don't believe it means the end of growth. Right?

Sure. I wasn't suggesting that it would be the end, I'm just trying to understand what the impact of those rollouts are and how sustainable that impact is?

We believe it's sustainable, but it's got to play out. The other factor that's at work here is a definite transition to not away from purely corporate enterprise sales, but corporate enterprise sales plus retail sales. So in addition to new markets getting lit up, we see an expansion of the channels within the carrier channel, that includes a growing percentage of consumers at retail.

So I think there's good growth dynamics beyond just network deployment.

I think you mentioned a couple of times, work on ASPs. Can you give us a little sense as to where you see the work needs to be done? What are the biggest impacts to ASPs that you're focused on and what work you can do to address those?

Well, there's tactical blocking and tackling on ASP, right? So this is kind of Sales 101. You have to win the deal, but you have to get every penny of ASP you can get, right? So that's job number one. And I don't want to sound flippant on that, but that's how our sales team is charged. They are compensated on gross margin, not on revenue. So I think we've got the right incentives in place for them to capture solid ASP without losing business.

And then job two is more of a strategic longer-term thing and that is differentiation. We need to continue to add differentiation into our product lines and get paid for it. And the way we get paid for it is in increased ASP, either on the base product, because it's highly differentiated, or in incremental features that we add to the product line.

And the other factor there, of course, is the portfolio factor. And we refer a lot to the 3GMPs and how that can help us blend gross margin up. We need to do more of that as well, to get more of a portfolio effect, so that we have high volume, lower margin products in the mix and more niche oriented high-value, high gross margin products in the mix. I see the 3GMP as a first step in that direction, not the only step in that direction.

And you tend to be at the front edge of these 3G rollouts of different variants. What is the dynamic of lower cost cards coming in to the mix at the carrier for your largest carriers? Where is that happening and where might that be a factor or not?

First, you hit the nail on the head. First to market is a pretty big benefit and if you're first to market on a new AirLink you get fully channelized, you get all of the carrier sales guys carrying your card, you get all the visibility in the advertising, etc. But eventually, as you intimated, price leaders enter the channel and that's just a fact of life. And by the way, that's been a fact of life for us for a couple of years running, right? That's nothing new.

Some of these guys stumble on their way to the market and we're there to pick up the benefit. But in our model, we anticipate that low-cost price leaders will enter the channels that we're in. Why? Because it's happened forever and it will continue to happen.

Okay. And I think there was a question asked earlier regarding the sustainability of marketing spend. And I think your comment--I just want to reinforce what I heard, which is that the proportion of the marketing spend is related to certification and giving your product launches comes to the front half of next year, obviously you're going to need to maintain your investment to roll those out. Is that kind of a fair way of representing it?

A couple of things to look at there. As Dave indicated, we've got a very active--we've got a lot of stuff happening in the first half. Lots of new product launches. And with new product launches will come a pretty big bump in certification costs. That will hit the R&D line. Also along with new product launches comes new product marketing launch costs. That will hit the sales to marketing OpEx line.

In addition to those two factors, we've got Q1 is trade show mania for us, with 3G SM and CTIA, they both hit in the first quarter. And those are our two biggest trade shows of the year and we invest considerably in those trade shows.

I'd characterize it as a bit front-end loaded, if you will, on our annual marketing and R&D expenses.

George Iwanyc of CIBC World Markets.

Congratulations on the quarter, Jason and Dave. Could you give some color on the competitive landscape and an idea of what you think your share is in North America, Europe and Asia?

Oh gosh. It's very competitive. I think if we look back at 2006, clearly we gained--well, I believe we gained considerable share in Europe and I think we gained that share from the incumbents who were there in 2005. In North America, very competitive landscape as well. I think you'd have to say, given our performance at the end of 2006, that we also gained share in the Americas, you know, particularly with the opening up of the Verizon channel for us. As you know, we've been out of the Verizon channel for probably a year and a half.

So, we've got a very strong spot at Cingular. We've got a solid spot at Sprint. And we've got a good strong toehold in at Verizon and that, I think you'd have to characterize that as share gain.

So where are we right now in terms of percentage share? I don't know. I think Option and Novatel report early February and you can tally up the results and do the math. But I feel pretty good about our share position.

The laptop OEM space, that's been a very competitive space. So far it's largely been a Sierra Wireless and Novatel show. Option's been very aggressive trying to gain a toehold there. And we feel pretty good about our current position and our current roster of PC OEM customers. I'm happy to consider us amongst the leaders in that segment.

Okay. And following up on the strong momentum you're seeing in Europe, how much further can you go with [inaudible] carrier bases? Do you have visibility into the rest of the year as far as adding new carriers?

The next two big steps, of course, would be Vodafone and T-Mobile and that's certainly not a forecast of success there, but those two guys, they drive a considerable amount of business in Europe. So we're going to continue to try to penetrate those channels.

But I really think job one for us is to protect the current channel positions we've won with these other key operators and to try and expand our product footprint within those carriers. I think that's a much easier task for us to accomplish. We've got AirCards in a lot of these channels now and we've got USB modems coming out, ExpressCard modem, rugged mobile modems and we've got a real opportunity to expand our product footprint in those key carriers.

But we're not going to stop trying to get Vodafone and T-Mobile.

All right. And one final question. You said that you had eight new products last year. Do you have an idea of how many you expect to launch this year and where does WiMax fit into the long-term plans?

I know exactly how many products we're planning to launch this year and I'm not going to share that with you. But it's lots more. Our pace of new product launches is accelerating.

With respect to WiMax, it's an area of high interest for us. Sprint's commitment to deploying WiMax, of course has inspired a good part of that interest. Our plan is to do some, certainly early research and maybe some early developments in that space. And we have no disclosable product launch plans on WiMax at this point in time, but it's an area of my interest.

Jeff Kvaal of Lehman Brothers.

Jason, I was wondering, you touched on it for a moment in your remarks, sell-through, I was wondering if you would be able to give us some additional sense of that, if possible?

It was good. There's always a little bit of art, frankly, in determining what your sell-through is in any given period. We get good information from some channels and we get sketchy information from others, quite candidly. But on balance, our assessment of sell-through in Q4 is that it was quite strong and significantly stronger than in the previous quarter. So overall, we feel pretty good about that.

Now, at the tail end of Q4, we launched with a bunch of new carriers. We launched with Verizon. We launched with Telstra. We launched with a handful of operators in Europe. It's still a little bit too early to tell how that launch volume is selling through. We just don't have clear visibility on that and won't for a couple of months.

But overall, we feel pretty good about sell-through.

All right. So for Verizon in particular it's still hard to say [inaudible] pretty good a new channel.

Yes, exactly. It's still very early days.

Okay, great. And then you two in the past have suggested that your AirCard gross margins are below the OEM at the moment. Is that something you can update us on?

That's still the dynamic, Jeff.

I mean, one might think that given that your products are branded in your card sizes that may not last forever. That your AirCard products might ultimately prove to be higher margin than your OEM cards.

Well, we sure hope so. Sure hope so. But right now, as you know, we've been competitive to improve our share position and I think while that's had a negative impact on gross margin, I think it's had a very positive impact in our strategic positioning and in our growth and in our operating margins. So we're not going to radically change our behavior on that, but we would certainly hope, based on the strength of our brand, based on our strategy to add more differentiation, that we can over time improve the gross margin profile there.

Okay. Did the legacy sales and the royalty payments affect the gross margin at all in this quarter?

Certainly royalties was an adjustment we made in Q3. The sale of legacy products, it did affect gross margin this quarter. I mean, we're certainly selling off older products at reduced prices and reduced margins. So that did have a dampening effect on gross margin in Q4.

And with respect to the IP payment, that in and of itself did not have any impact to gross margin. That was a prepayment for expected royalties in the future.

All right, got it. Is it common to, from time to time, to be pushing through legacy products, so this isn't--.

As you transition from technologies, that is quite common.

Was it a material factor in the gross margin this quarter?

It was noticeable. I'm not sure I would deem it material.

There's always a tradeoff when you make that decision, right? Because you see this legacy thing that could be an inventory risk and on the other hand, you see a deal come through that would solve that inventory risk for you immediately, but it has a dampening effect on gross margin. We have to make a battlefield call on that and with respect to this particular situation, we made the battlefield call to get rid of the inventory risk and take the temporary pain on gross margin.

John Bright of Avondale Partners.

First on the gross margins, you talked about a couple of puts and takes in the quarter. Was there anything that you would consider one-time in the quarter that impacted the gross margin or was there anything that you really thought was unexpected?

No, I wouldn't characterize it as--you know, there's always a series of things that happen in a quarter. I wouldn't characterize any of them as unusual.

Okay. And then, if I take that and look forward at gross margins, you talked about some cost improvements potentially in Q2 '07. If I think about these improvements, should I think in terms of them coming from royalties and maybe you shifting contract manufacturers or what's causing improvements potential and cause?

The comment is really around being able to realize lower component costs. And that's something that tends to blend in in the first half of the year. We typically get price reductions from suppliers early in the year and as we eat up the existing inventory of those components early in the year, we then can buy at lower prices once we've gone through old inventory. So, that's something that blends itself in in the first half of the year.

Okay. And then the offset to that, Jason, you've talked about price, we've talked about it on the call here and we've talked about the competitive environment somewhat. A lot of people talk often about Huawei in the marketplace. Is that something--have you seen an increase in their presence in the marketplace or has anything competitively, since the last time we spoke, changed dramatically, either with Huawei or with the other players?

No. I'd characterize it as the same as it's been in the last year. We're not going to pull punches. It's an intense pricing environment and guys like Huawei and Pantech help contribute to that aggressive pricing environment. And that hasn't changed. The other thing that hasn't changed is we know that we're not going to compete against guys like Huawei and Pantech on price. They will be the price leaders. We'll give them that position. We'll take the innovator position along with guys like Option and Novatel and be the first to market guys and be the differentiated guys and take a bit of an ASP premium.

Okay. And another question would be on the rugged mobile side of the business, you've had somewhat of a tricky transition here on that side of the business. What's your outlook on that side of the business, maybe in the first half of '07?

In the first half we have modest expectations, because we're going to get the products to market late this quarter, early Q2. I would view Q2 as the initial quarter with those products in the market. And these are not AirCard products like where you do an aggressive launch with a Verizon or a Cingular and you make very large shipments into channels for a product launch. These are more end-user demand driven products and that's how they're sold. So I would view it as a slow ramp in Q2 and ramping up in the back half of the year.

Are you seeing increased competition in that market?

Yes, there is competition. I don't know if I'd characterize it as increased competition. The thing for us that's tricky on MPs is we've essentially ignored the space for a year. And we haven't been quick to refresh our product line. So we've been marginalized now for about a year in that segment, so it's a bit of a relaunch for us. And we've got to regain a lot of that customer loyalty that may have been shaken when we didn't have new products for them for a year. That's the tricky thing we need to navigate there.

Overall, I'm very bullish on the segment. I think, we continue to, not withstanding, we haven't been very focused on the space for a year, I continue to believe we've got a lot of end customer loyalty out there and a very differentiated product to offer.

Lastly, you mentioned 10% long-term operating margin as a goal that's still out there. Dare put a timeframe on that?

I will not dare to put a timeframe on that.

Within five years timeframe, would you feel comfortable with that?

Yes.

Glen Tracey of Pacific International Securities.

With regard to your guidance for Q1 and looking back to what you did in Q4, most of your revenue increase was from PC cards. Would you characterize the increase in revenue expected for Q1 also to be mainly driven by PC cards or do you see more of a balance with the OEM product?

We're not giving product line guidance, Glen. So I can't really help you with that. We did in Q4, just to put a fine point on it, we saw pretty decent growth in both OEM and PC cards and certainly our expectation is that we will continue to get good growth from both of those segments in the first quarter.

I think PC cards were up 33% sequentially in Q4 and OEM sales were up 21% sequentially in Q4. So it's definitely weighted to PC cards, but there's a decent balance there.

Okay. You mentioned earlier, Jason, about the onus being on differentiating your product in order to be able maintain or increase ASPs. Can you give us some sort of idea as to how you would like to differentiate products? You've got announcements coming from Sprint this week about products with Rev A and GPS functionality on it, for instance, from a competitor. Is there anything you can talk about there?

With respect to our specific differentiation strategy?

Yes.

Absolutely not.

No kind of generalities in terms of how you'd like to address that?

No. I'm sorry, that's competitively sensitive.

Okay. You mentioned earlier about planning for market share adjustments in particular channels as low-cost competitors like Pantech and so on come in. Can you give us an idea as to how you look at channels and your market share as those factors happen? I guess it's happening in the channel right now.

Just from a process standpoint, we have to handle that channel by channel. Because it's different every time. A Pantech threat at Sprint is going to be different than a Huawei threat at Telefonica. And we may respond to those threats in different ways. So it's tough to give you kind of a rule of thumb response to how we plan for that, because it really is different in each of these carriers.

Certainly our hope though that we can get more of our products into the channel so that if anything changes with anyone product we can respond with, you know, a USB modem, for instance or an ExpressCard. So that product portfolio approach is important to our strategy.

Do you ever kind of look at a channel in terms of what is an acceptable market share for you to be putting effort into the channel or at what point you believe that, you know, if market share falls below a certain level, the channel is not performing the way you'd like it to?

No, it really has little to do with percentage share. It has everything to do with whether or not it's profitable. And if we have 20% share in a channel and it's profitable, we'll stay there forever and gladly take it. And try to chip away at the other guys' share.

Right. You mentioned Telefonica a minute ago and you mentioned that you're now shipping into Telefonica in Spain. Is the product, the 875 now certified for use on all Telefonica networks?

Our announcement is specifically around Spain. As you know, we've also launched with O2 in the UK, now owned by Telefonica. So those are the two that we've disclosed. We have nothing to disclose with respect to Telefonica International, as an example. And with respect to the products we're shipping to Telefonica, we are shipping both the AirCard 850 and the AirCard 875.

Okay. I don't know if I kind of misspoke the question, but I guess I wasn't asking whether you're selling into other Telefonica channels, but I was just trying to understand the certification process at Telefonica and understand whether or not product will, by being certified for Telefonica Spain, does that imply that it's available or would be available for other networks within the Telefonica family?

No, it doesn't, unfortunately. It doesn't give you a free pass on certification as you go from market to market.

Okay. Touching on gross margin for a second, I think back in the Q3 conference call there's indication that you expected to be able to get back into the low 30% range for gross margin. Is that still something that you're thinking is a possibility or has the landscape changed such that you have more conservative expectations?

That's still our goal. The question was asked earlier about our long-term business model and it is still our goal and we know we have a series of tactical and strategic steps we need to take to get to that goal.

We still think it's achievable with the right moves. It's not achievable overnight. And it's going to take blocking and tackling on what we're doing now. It's going to take more high gross margin products brought into the mix and the right strategic moves and the right level of differentiation. So, long-term business model, we still have a goal to get to 30% on gross margin and 10% on operating margin. But you know, we're not going to sacrifice our short-term growth to get there prematurely.

Sure. One last question about headcount. Could you give us an update on that, please?

We entered the year at 296.

Okay, great. Thanks very much and congratulations.

Operator, we have time for one more question.

Deepak Chopra of National Bank Financial.

Good quarter, guys. I was wondering, on the OEM business, should we expect more or less a seasonal year, where it sort of starts off a bit light and gains momentum through the year and exiting? How should we model that business more or less?

It's such a nascent business, Deepak. I think it's really tough to model the typical laptop seasonality. The dynamic that we see going on is more laptops, times more platforms, times more carriers. Hopefully that means continued buildup of total available market and good growth that would tend to cover-up seasonality patterns. But it's so nascent, we've just got to see how it plays out.

That's fair. Maybe just a little bit on the CDMA side. Sort of back of the envelope, it looks like maybe your Sprint revenues might have been flat or a little bit down in the quarter. First, am I correct? And second, if I am, is that a market share loss there or is it--what's happening on that account?

I think that's fair to say. I mean, I think you characterized it right. Pantech is now in that channel, so there's three guys in the channel. It's a little more crowded than it was. And we're still comfortable--well, I shouldn't say we're comfortable with our position there. We want to improve our position, but we're not in panic mode. I think we've got some good new products that Sprint should be interested in. We've got an opportunity to expand our product footprint at that operator.

That's great. And Dave, usually you give a channel breakdown. I was wondering if you could provide us with those difficult numbers?

Sure.

Not difficult for Dave.

So, the carriers were 46%. This is Q4, Deepak. Carriers 46%; resellers 27%; PC OEMs 17%; Other OEMs 9%; then there's Other at 1%.

That's great. Thank you, guys. Great quarter.

Gentlemen, please continue.

We are concluding the call.

Thank you. Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.