司亞樂 (SWIR) 2007 Q1 法說會逐字稿

Good afternoon, Ladies and Gentleman. Thank you for standing by. Welcome to the Sierra Wireless, Inc. First Quarter Results Conference Call. [OPERATOR INSTRUCTIONS] I will now turn the conference over to Mr. Jason Cohenour, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Luke. And good afternoon everyone. Thank you for joining today's call. Joining me today at our Corporate Headquarters is Dave McLennan, our CFO and today we'll be discussing our 1st quarter 2007 results and the 2nd quarter 2007 guidance. By way of an agenda, I'll be turning the call over to Dave shortly to read the forward-looking statements disclaimer. I'll then provide a business update, hand it back over to Dave who will review our Q1 financial performance and our Q2 financial guidance. I'll then provide a summary and open the line for questions.

With that, Dave, I'll transfer the call to you.

Thanks, Jason and good afternoon, everyone. Certain statements on this conference that are not based historical constitute forward-looking statements or forward-looking information within the meaning of applicable securities laws. This 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 2nd 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 actions and other future events. We caution you not to place undue reliance upon any such forward-looking statements, which speak only as to the day that they are made. These forward-looking statements appear in a number of different places and can be identified by words such as "may", "estimate", "projects", "expects", "intends", "believes", "plans", "anticipates", "order 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 and 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 meet the needs of customers and gain commercial acceptance, our reliance on the deployment of next generation networks by major wireless operators and continuous commitment of our customers and increased competition. These factors and others are discussed in our annual information form which may be found on CDAR and in other regulatory filings with the Securities and Exchange Commission in the United States and the Provincial Securities Commission 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 update take any obligation to update the forward-looking statement should the assumptions related to these plans, estimates, projections, beliefs and opinions change. With that, back to you Jason.

Thanks, Dave. The first quarter of 2007 was a period of record quarterly revenue, improved profitability, new product launches and strategic milestones. During the quarter, we had record revenue of $85.4 million, representing a 25% increase over Q4 of 2006 and an 89% increase of Q1 of 2006. Our sequential revenue growth was driven primarily by increased sales of our HSDPA and EV-DO AirCard products. Our strong top-line growth, combined with higher gross margin helped to drive improved operating earnings of $5.5 million, our best results in more than two years. Our Q1 operating earnings of $5.5 million represents an operating margin of 6.5% and compares to the earnings from operations of $1.4 million in Q4 of 2006 and $1.9 million in Q1 of 2006.

We also commenced commercial shipments of three new products. Our rugged 3G MPs for both HSDPA and EV-DO networks and our new USB modem of HSDPA networks. While executing on our business, we also found time to complete a definitive agreement to acquire AirLink Communications, an acquisition that we believe will significantly expand our high-gross margin product lines and establishes us as a leader in the rugged mobile and M2M connectivity. Looking forward, we expect that our current product portfolio, combined with more new product releases, further channel expansion and the addition of AirLink will help drive continued revenue growth and profitability during 2007.

Moving to specific updates on our product lines, I'll start with our AirCard business. AirCard sales were up approximately 34% compared to Q4 of 2006 and up 99% compared to Q1 of 2006. Our sequential increase in AirCard revenue was driven primarily by strong sales our HSDPA and EV-DO Rev A AirCards to existing wireless operator channels. And anticipating your question, we had very little contribution from our new USB products, which also come under the AirCard banner.

In North American, we believe that we continue to have a solid channel position with A T & T, with our AirCard 875 and at Verizon and Sprint with our AirCard 595. In Europe, we announced the commercial availability of our AirCard 875 with Telefnica in Spain and with [Dibitel] in Germany. We also continue to supply our HSDPA AirCards to a number of other operator channels and resellers in the region.

In the Asia Pac Region, we announced the commercial availability of our AirCard 875 with Telstra in Australia. We began commercial shipments of our AirCard 875 U, USB modem of HSDPA networks late in the first quarter of 2007 to an operator in Latin America. That had a modest contribution to our financial results. We also announced that Sprint had selected our AirCard 595U, USB modem for EV-DO Rev A for use on their mobile broadband network. We have now commenced shipments of the AirCard 595U to Sprint and the product is available through Sprint sales channels, including retail. Just yesterday we announced the launch of our AirCard 875U with A T & T, as well. We expect the AirCard 875U to be available in A T & T channels, including retail stores in early May.

We have secured additional purchase commitments for our new USB products from other major operators in the U.S., Canada and Europe. We expect our new line of USB devices to significantly expand our total addressable market and to be an important contributor to our business. Our ExpressCard product line was introduced in 2006 with the announcement of the AirCard 597E for EV-DO Rev A networks. We now expect the AirCard 597E to commence commercial shipments in the current quarter of 2007. Also during Q1, we introduced our AirCards for HSUPA networks. Our HSUPA AirCards will support maximum uplink speeds of 2 megabytes per second and maximum downlink speeds of 7.2 megabytes per second. We expect to commence commercial shipments of our HSUPA AirCards in mid-2007 in both PC card and ExpressCard form factors.

Moving to embedded modules. Sales of our embedded modules were up 9% compared to Q4 2006 and up 128% compared to Q1 of 2006. About 50% of our embedded module sales came from PC OEMs and the balance from non-PC OEMs. Our sequential revenue increase in this segment was driven primarily by sales growth in our EV-DO and 3.6 HSDPA mini card modules.

We announced that Cisco Systems selected our 3G embedded modules and that's both for Rev A and HSDPA for integration into their integrated service routers for enterprise disaster recovery and rapid deployment applications. We also have design wins with Ericsson, Digi and others for fixed wireless terminal and fixed mobile conversion solutions. We view these wins as strategically important as they help us to further diversify our embedded modules business into what we believe to be an important emerging growth segment.

In our PC OEM business we announced that Fujitsu Siemens selected our new MC8780 for HSUPA for integration into its LIFEBOOK P7230 professional notebook. We expect the PC7230 with our embedded USUPA module to launch in Europe sometime this summer.

We also announced design wins with FlipStart and Dialogue, both makers of ultra mobile computers.

In total, we now have 12 PC OEM customers, including [Linovo], HP, Fujitsu Siemens, Panasonic, [Hasustech], Dialogue, FlipStart Labs and [I-tronics]. Eight of our PC OEM customers currently have commercially available products featuring our 3G embedded module solutions representing approximately 42 distinct platforms and AirLink combinations. We believe that we have established a strong leadership position in this strategic market segment.

Onto rugged MPs. As expected, revenue contribution from the MP product line has been modest while we completed development of our new 3G versions of the product. I'm now pleased to report that late in the first quarter of 2007 we began initial commercial shipments of our new 3G MP products. The MP595 for EV-DO Rev A networks and the MP875 for HSDPA networks. The MP595 is now certified for use on the Sprint mobile broadband network and the MP875 is certified for use on A T & T's broadband connect network. With the launch of these new MP products and the expected addition of AirLink's business, we expect that the rugged mobile and M2M segments of our business will grow and positively impact our financial results.

Onto some general comments. Our bookings for Q1 were very strong and give us good visibility to Q2 revenue. Our channels also reported strong sell-through during the quarter. Our gross margin improved during Q1 2007 compared to Q4 2006, driven primarily by product cost reductions and solid ASP discipline. We remain focused on driving continued growth, reducing product costs, expanding our product line and investing in new, higher margin products and services, such as our 3G MPs and AirLink products. During the quarter, we continued to witness accelerating deployment of high speed, mobile broadband networks around the world. We view such deployments, coupled with the anticipated aggressive promotional activities as important growth catalysts for our business. Overall, we're very pleased with our Q1 2007 results, as they highlight continued improvement in financial performance and business model leverage. We believe that our strong new products and business development execution will continue to drive revenue growth and improve profitability in 2007.

Now back to Dave for a Q1 financial review.

Thanks, Jason. Our results are reported in U.S. dollars and are in accordance with U.S. GAAP.

For the first quarter of 2007, our revenue was a record $85.4 million. Gross margin was $23.3 million or 27.3% of revenue. And our net earnings were $5.3 million or $.20 per fully diluted share.

Our results include $900,000 of stock-based compensation expense, of which $100,000 is in cost of sales and $800,000 is in operating expenses. As well, the results include $300,000 of purchase price amortization associated with the acquisition of Air Prime in 2003. On a pro forma basis, excluding these items, net income after tax was $6.2 million or $.24 per diluted share. During Q1, we generated $10 million of cash in operating activities. And at the end of Q1, our cash balance was $93.9 million and inventory was at $27.9 million. Relative to the guidance we provided for the first quarter of 2007, revenue of $85.4 million was better than our guidance of $82 million. Earnings from operations of $5.5 million were better than our guidance of $2.5 million. And net earnings of $5.3 million or $0.20 per share were better than our guidance of $3 million or $.12 per share.

Comparing Q1 '07 results sequentially to Q4 2006, revenue increased by 25% to $85.4 million, from $68.3 million in Q4 2006. This increase was driven primarily by sales of our new 3.6 HSDPA and EV-DO Rev A AirCards. During the quarter, A T & T, formerly Cingular Wireless and Verizon each accounted for more than 10% of our revenue. In an aggregate, these two customers represented approximately 45% of revenue. This compares to 37% in Q4. We expect customer concentration to fluctuate quarter to quarter.

Gross margin increased to 27.3%, compared to 26% in Q4 '06. This reflects favorable product cost reductions and solid ASP discipline. During the quarter, we launched three new products. Commensurate with this increased product development, certification and launch activity, our operating expenses increased to $17.8 million from $16.4 million in Q4. Earnings from operations increased to $5.5 million from $1.4 million in Q4. This is a significant improvement in profitability and represents a 6.5% operating margin, up from 2.1% in Q4. Net earnings increased to $5.3 million or $0.20 per share from $2.4 million or $0.09 per share in Q4.

Looking at the balance sheet compared to December 31, 2006, our cash and short-term investment balance grew to $93.9 million. That's up from $87 million at the end of Q4. Accounts receivables decreased to $49.3 million from $57.4 million at December 31. This results in an improvement in DSOs to 48 days at the end of Q4, down from 62 days at the end of Q4.

Inventory increased during the quarter to $27.9 million from $18.9 million. The increase in inventory resulted mainly from an increase in inventory of new 3G products to support anticipated increased customer demand.

Looking at revenue by product line, in Q1 2007 revenue from AirCards was up 34% to $64.5 million and that represents 76% of our mix. Embedded modules were up 9% to $18.1 million and that represents 21% of our mix. Within the embedded module product line sales to PC OEMs were approximately $9.1 million.

MPs were 1% of our revenue in Q1, amounting to $800,000. That's down from $1.2 million in Q4. And other revenue was 2% of our revenue, representing $2.1 million and that was slightly down from $2.5 million in Q4.

Looking at revenue by geography. In Q1 2007 revenue in the Americas was $52.9 million or 62% of our revenue. In Europe, revenues were $16.1 million or 19% and in Asia Pacific, revenues were $16.4 million or 19%. Our sales in the Americas increased 42% compared to the 4th quarter of 2006 and as a result of strong sales of our AirCard products to A T & T, formerly Cingular and Verizon. Compared to Q1 of the prior year, our sales in the Americas increased 68%. In Europe, our sales were flat to Q4 '06, but compared to Q1 of the prior year, our European sales were up 100%. In the Asia Pacific region our sales increased by 10% compared to Q4 '06, primarily as a result of increased embedded module sales. Compared to Q1 of the prior year, our Asia Pac sales increased 186%.

Moving onto guidance for the 2nd quarter, we're providing financial guidance for the 2nd quarter ending June 30th, 2007. This guidance reflects our current business indicators and expectations. Our guidance for the 2nd quarter includes a higher than usual revenue contribution from new product and channel launches. As a result of this activity, we expect our 2nd quarter operating expenses to increase relative to the 1st quarter. There are uncertainties associated with the launch and early ramp of new products that could affect our ability to achieve guidance. 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.

Based on strong bookings, we have solid visibility on revenue in this quarter. Our guidance for Q2, excluding the expected acquisition of AirLink is as follows. On a GAAP basis, we expect revenue to be $92 million, earnings from operations $6 million and net earnings of $5.5 million or $0.21 per share. On a pro forma basis, excluding stock-based compensation and purchase price amortization of the acquisition of Air Prime in 2003, we expect revenue to be $92 million, pro forma earnings from operation is to be $7.3 million and pro forma net earnings to be $6.5 million or $0.25 per share.

With respect to the acquisition of AirLink, we believe that we are on track to close the acquisition by the end of the 2nd quarter. There may, however, be an opportunity to complete the acquisition as early as the end of May. If we can do that and including AirLink for one month in the 2nd quarter, would positively impact revenue by approximately $2 million. This estimated AirLink impact incorporates the elimination of inter-Company revenue.

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

Thanks, Dave. So, the 1st quarter of 2007 was a period of record revenue and significantly improved profitability. We grew revenue by 25% sequentially and delivered our best operating profit in more than two years. During the quarter, we launched and commenced initial shipments of three new products, including our new 3G MPs and first USB modems. Following quarter end, we launched our new USB modem with Sprint in multiple channels, including retail and announced an imminent launch with A T & T, as well. We also continued to have success in our embedded modules business, announcing breakthrough design wins with Cisco for enterprise routers and Ericsson for fixed wireless terminals. Our business with PC OEMs also continued to build momentum, earning design wins with new and existing customers. And while executing on our business, we were able to complete a definitive agreement to acquire AirLink, a transaction we expect to close by the end of June, 2007. We believe AirLink will help us to focus on and strengthen our position in higher gross margin products for M2M and MRM. We believe that our market continues to experience a strong rate of growth. Wireless operators around the world are continuing to deploy new, high speed wireless services in their markets. We believe that these deployments, combined with aggressive promotion of these services, will continue to drive accelerating end-user adoption of devices such as those made by us.

Looking forward, we expect our current product portfolio, combined with more new product releases, further channel expansion and the addition of AirLink will help drive continued revenue growth and improved profitability during 2007.

And with that, Luke, we'll open the line for questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from Ray Sharma of GMP Securities. Please go ahead.

Thanks for taking my question. Congratulations on a strong quarter and a strong guidance, guys. I had a question to start with for Dave, if I could, on the inventory? It's just that if you look over the last five quarters, inventory seems to be quite volatile, in terms of moving and its sequential movement. Is there any reason? I know you mentioned about the build up in the [inaudible] products and the inventory required for that. Is there any specific reason for that volatility and the up and down swings over the last few quarters?

Well, a variety of reasons. If you go back to Q3 last year we were going through a significant technology transition between 1.8 HSDP to 3.6 and then also Rev 0 to Rev A. So, during those types of periods there is lots of impact on inventory as you build for the new stuff and sell down on the old stuff. And we had a good ramp of sales in Q4 that saw our inventory run down and then we built some of that back up, particularly with respect to the new HSDP stuff and EV-DO Rev A stuff in the 1st quarter.

So, it really reflects the product flows of our business.

Okay. The second question I had is that when we talk about customer concentration to customers greater than 10% it has combined to about 45%. I'm just curious. If one customer and I'm not saying in this particular quarter, represented 10% and the other customer represented 35%, hypothetically speaking. Is that something you think would be reasonable to disclose in any given quarter?

We don't disclose any granularity. It's just if they're above the 10% threshold we disclose them. But we don't get anywhere [gran] there with respect if it's 11% or 35%.

I understand. It just that if --

If anything, Ray, I'll comment. This is Jason. We've been more transparent on that than we have historically to point out the fact that we do have customer concentration in our business. And that's a good thing and a bad thing. Right? The good news is we have big customers. The bad news is we have big customers. But looking forward, as you can see from our recent announcements, what we're doing is within those customers, we're attempting to expand and diversify our product footprint that considerably diminishes the risk of the customer concentration when you have more than one product in the channel. And I hope it doesn't go unnoticed that we've been announcing a number of new OEM design wins and a number of new operator channels, as well. So, we expect, as we move forward, that that customer concentration metric will move around a bit. No doubt we've got three big drivers of our business in the United States. But we're busy at work diversifying our position within those channels and adding new channels, as well.

Okay. Thanks. And the last question, guys, just on AirLink and I'm just curious. Given that the acquisition has closed, I presume that you guys can't give too much [inaudible] at this time in terms of operating expenses. You've just closed headcount and some other key areas like last year margins and so on. But is there any other additional information you can give to us at this time? Because you've given us $2 million for the month, how about your plans for disclosure in the future? Do you think AirLink will be segmented or will it be combined with something like the MP line? What are your thoughts in that respect? And thanks for answering the questions.

I think, ultimately Ray, what we'll do is we'll provide segmented revenue results and the Company formerly known as AirLink, if you will, will show top line results for those products, as well as our MP product that will roll into the AirLink group. We're not going to provide segmented full P&L results though. A question here internally that we have yet to resolve is how much transparency we'll provide in the next quarter's guidance. So, we may or may not give more P&L transparency on the AirLink performance. But I do think after that, following next quarter, the level of segmentation we'll give is on the top line. And I also think we've given sufficient information to the market on the business model of AirLink. I think that's pretty well established now at last year's revenue levels and gross margin levels in the mid 40's. And an operating margin of a bit north of 10%.

Thank you.

Your next question comes from Gus Papageorgiou of Scotia Capital. Please go ahead.

Thank you. Congrats on a great quarter. Just a question folks, around the gross margin. I wonder if you could give us a little more detail on how much of the gross margin improvement was ASP stability and how much of it was design cost reduction? And then as a follow up, last year we saw a great deal of volatility in the gross margins. We lost 10 percentage points from Q1 to Q4. Can you kind of characterize where you think you are this year? And are we going to see the same type of volatility? Or do you think we'll be more stable?

Gus, it's Dave. You know the improvement in gross margin was more weighted on the cost side. We, with respect to ASPs, we experienced stability in ASPs as opposed to the trend that you referenced for 2006 of declining ASPs. So, a combination of stability on ASPs and cost reductions really drove that improvement in GM.

And Gus, just to add to that on a looking forward basis, we do believe that we've got visibility to some favorable cost movements. In Q2, Q3 those will start to have an impact on our overall cost of good. And that's based on just regular annual price negotiations with various suppliers and manufacturers. And that's got to be weighed against ASP trajectory. Right now that trajectory is pretty good. So, we feel pretty good on the cost side. We feel pretty good on the stability of ASPs. We also feel good about adding higher gross margin products to the mix, including the MP and AirLink. So, those are positive levers. Temporarily we'll probably have a bit of a negative mix shift, as well, because our expectations on USB in particular are quite high. And USB, as we've shared with you in the past, is a device that we designed with a partner. It was effectively a turn-key project that we did with a partner. So, while that negatively affects the gross margin model for the product, it delivers a great operating margin because we're pretty thin on R&D in bringing that product to market.

So, we've got a few positive levers. We've got a negative mix lever short term. So, I'd expect generally speaking gross margin to be stable. And as we go through Q2 and look beyond, I think we have more positive levers in our favor. But that's going to play out.

Great. So, you're speaking temporarily some mix shift issues, but looking through the second half, as long as there are no mavericks out there destroying prices, things look pretty good?

I think that's a fair characterization. We've got good visibility to improving mix and improving cost. And the wild card is what happens to ASP on some of the big volume runners.

Gus Papageorgiou. Great. Thank you very much.

Your next question comes from Dev Bhangui of Haywood Securities. Please go ahead.

Thanks Jason and Dave and congratulations for [inaudible]. The first question more so in line with respect to the AirLink acquisition. I know that a combination of your traditional MP product line and the AirLinks products is going to form now a significant chunk of the growing of [inaudible] for the Company. Just I'm curious, [inaudible] cost issues both verbally, as well as in writing. Can you give us some kind of an idea as to what extent [inaudible] AirLink is going to expand both on the top line as well on the margin side? I [inaudible] margin of about 45%. [Inaudible] modem line margins have been [inaudible] about 15%. And I guess there is some scope [inaudible], as well as far as having [inaudible] North America. Can you give us flavor as to what extent the magnitude of that impact would be the expansion would be? And what time frame [inaudible] showing impact with respect to [inaudible]?

Well, I'll give you some directional commentary around that, Dev. And I'm going to avoid being very specific. Directionally we expect that business to grow. The combined AirLink and MP business, we expect that to grow and we're going to make the investments required to enable that to grow. And we think that the markets that those products get sold into, while it may not be the hyper growth we're seeing in the mobile computing space right now, we're seeing very strong growth in that segment. And I think we're well-positioned to take a pretty god share of that growth. So, our expectations are pretty good growth. AirLink has experienced 25% year-over-year growth, as an example. Clearly our aspirations are above that. It remains to be seen how much above that we can get. And I think the positive impact on both gross margin and operating margin should be pretty self-evident. As a stand alone company, AirLink has better gross margin than our current corporate gross margins. And better operating margin, as well.

So, the extent to which we can grow that business and maintain the gross margin and operating margin profile, we'll have a steadily improving and bigger impact on the overall blended business. So, we're pretty enthusiastic and I wouldn't expect overnight miracles. But we're enthusiastic about being in the M2M space, which a clear, diversification move for this company. And beefing up in the MRM space. We believe in both of those segments. We believe there are growth opportunities there and we also believe that both of those segments come with a fundamentally better operating margin profile. So, we're chasing that and our expectation is that we're going to build it over time and we're going to make the investments appropriate to do that.

Thanks. Just quickly in terms of, I guess the new products that are being released in this particular quarter, which have already started shipping. Particularly with respect to the UPA [inaudible] on the PC cards. Since both of [inaudible] channel, can you give us some kind of flavor as to how, with your existing large customers, there is going to be distribution between the traditional [inaudible] card versus the new Express form factors? As well as UPA AirLink is concerned. And given that they're going to be commercially available in the second half or I guess the beginning of the second half, I would think. [Inaudible] of your competitors with respect to the HSDPA versions of ExpressCard is going to be short lived. And if you can give us some kind of a flavor as to how fast your carrier partners are going to be replacing them? And [inaudible] advantages or competitive advantage you would have by the virtue of being one of the first [inaudible]?

Well, we're working hard to be first in market on HSUPA, and as I expect it to be a horserace by the way, is still an option. And we expect to hit the market with both form factors as you've indicated on the card side, ExpressCards and PCM CIA, as well as USB. And I think with respect to the speed of transition of certain operators, that's going to be done on an operator by operator basis. We're seeing that right now, in Europe as an example, we're still selling HSDPA 1.8 cards to some of our existing channels. While others have transitioned to our 3.6 card or transitioned to our 3.6 card some time ago. So, that's really going to be driven by individual operators and the speed with which they upgrade their networks to support UPA. I do think in North America, a different competitive dynamic particularly in the U.S., I do expect players like Cingular to go rapidly to UPA. Certainly UPA capable devices and I would certainly expect them to be [inaudible] in UPA service deployment. So, my expectation is that transition in the U.S. will happen quickly. And in Europe it will happen over a longer period of time.

I'm not sure if that answers your question or not.

Yes. Thank you. One more question from my side. I guess with respect to the European market and also I guess [inaudible]. Currently you guys [inaudible] and I'm just trying [inaudible] and link both these [inaudible] together. One of your competitors reported this morning and the results are pretty bad with respect to the European market. But with respect to your results, European market you're stood fast with respect to the [inaudible] and [inaudible]. So, obviously you're making gains, continual gains in the European market. We're already impacting your [inaudible] hopefully in the [inaudible]. Now given your [inaudible] [inaudible] your [inaudible] compared to North America in the past with respect to the ASPs and margins, you guys must have done something to kind of have that steadiness in Europe compared to your competitors. And can you give us some idea as to why are some of the competitor advantages that you are seeing in the European market [inaudible] relatively un-impacted compared to your competitors?

Well, just a little clarification there. Our sales in Europe were flat. We weren't up in Europe; we were basically flat Q4 to Q1. Although I'd like it to have grown, we didn't grow; we were flat. And with respect to options results, I think you're talking about, I think they had well publicized challenges in the second half of last year. This quarter was up modestly. I think that's mainly driven by a very hotly competitive market in Europe. And we have a very different customer concentration profile than our other competitors in Europe. So we're able to pull a few different levers, I guess you could say. And we've got a smaller business than our competitor in Europe.

So, if I look at a player like Option and wonder about what the negative impacts are on their business, yeah, we're probably one of them. But my guess is there are other players, like some of the Asian price leaders that are having a bigger impact there.

The other thing I would say about our business in Europe is that we're working hard to make it a diversified field for us. So, while adapter products are quite important and will continue to be important, we're also focusing pretty hard on building our OEM business in Europe and we've had some pretty good success there with players like Ericsson, Fujitsu Siemens and others. So, our play there, from a differentiation standpoint is really to be more of a diversified player and in being a diversified player and having OEM solutions through partnerships, we actually increase the value we can bring to the operators.

And just in terms of [inaudible] question, can you just give us some idea about further channel expansions that you were talking about?

Well, there are kind of two elements on channeling expansion, if you will, Dev. One is adding new customers, right? And that includes wireless operator customers, distribution partners, new OEM design wins. And that's a constant activity and we've mentioned some new names in this presentation. We've definitely added a few new channel partnerships. The other part of channel expansion is actually expanding the footprint within existing channels, the product footprint within existing channels. We're very busy at work doing that and working hard to expand the footprint within some of our big operator channels.

Thanks for taking my question and [inaudible].

Your next question comes from Deepak Chopra of National Bank Financial. Please go ahead.

Jason, I was wondering if you could talk a little bit about the market. Like maybe just in your opinion how big do you think the wireless data modem market can become? And just in terms of maybe a percentage of the mobile hands in market, just where do you think this market can go over the next two to three years?

You know I believe that the market probably has 40% compounded annual growth in it for the next few years, on a volume basis. But don't take that to the bank; I could be wrong by plus or minus 10% pretty easy there. So, I think plainly put the growth dynamics are very good in the market right now. I have no reason to believe that's going to change anytime soon. Our job is going to be to compete effectively in that high growth market and take a bigger part of the share of the growing market. Because obviously a market growing at 40 plus percent a year is going to suck in some additional competition.

So, I think it's good and the other thing I see that's encouraging is it's historically been a data card play. And more and more now from a product implementation standpoint, the market is getting diversified. USB is a great example. You heard [Novatel's] great pre-announcement last month and most of the upside was driven by USB. Our belief is that USB, picking one example, is an interesting indication that wireless data is going beyond the enterprise laptop user and probably now being used by a growing number of consumers and desktop users.

I think that's kind of fundamentally changed the addressable market. Additionally, you've seen our design wins with laptop OEMs. It's another kind of new way to market, if you will. And I think that's a good catalyst for overall industry growth. And add to that some interesting progress in the router and fixed wireless terminal space. That's brand new development and we view that as another interesting growth catalyst for the wireless data market overall.

Fair enough. And [inaudible] question. You guys have mentioned it's more stable now. In a stable environment, what's the expectations in terms of year-over-year decline? Is it like 10 to 15%, versus something more aggressive, characterizing a non-stable environment? Maybe you could just talk about that? And where do you see it in the second half of the year or next year or do you have any type of visibility into even two or three quarters out?

Well, it's pretty unpredictable, frankly. We do feel though like it's stabilized right now and the line ups are fairly well-established. There's a group of innovators who tend to be first to market and capture a strong position in the channel. And we innovators are complimented by Asian price leaders who usually come in with new AirLinks after we do. And we tend to have differentiated products and differentiated branding in the market. And the price differential between the innovators and the price leaders, I think is well-established. So, we feel like that has stabilized. If you look at AirCard ASPs in the recent past, they've been quite stable. So, looking forward, if annual ASP reductions are in the high single digits, low double digits, that probably feels about right. And I think that give us a pretty good opportunity to make sure that cost reductions outpace ASP reductions.

Okay. And maybe on last quick question there for Dave. With the AirLink acquisition, do you expect any cost synergies there?

Over time, yes, Deepak. But that acquisition is really more of a investing and growing that part of our business. You know AirLink is a small, lean organization so we don't expect to go in there and rearrange things and take a lot of cost out. I think over time I think there will be some synergies. But it's actually more of an investment play into the machine to machine segment.

Okay. Great quarter, guys.

Your next question comes from John Bright of Avondale Partners. Please go ahead.

Thank you. Good afternoon, Jason and David. On the top line, Europe we've talked about it some. You were flat sequentially. We saw options results this morning. What do you think is taking place there, Jason, in the marketplace? Anything particular?

Well, I'm not sure if I understand. You mean to cause option slowdown or?

Well, the overall market. You were flat sequentially. Yes you were up year-over-year. But you didn't see a sequential gain in the quarter in the European market. Did you not expect one? Do you think the market there might be slowing down, decelerating?

No. I don't think it is. And I'm not going to get overly excited and focused on a flat Q4 to Q1 for us. Year-over-year we're up 100% in Europe and that feels like a better comparison. I don't think the market there has plateaued. I think there is good growth catalyst there, just like there are in the U.S. markets. And I'm bullish on the growth prospects, but I'll warn that Europe has a different competitive dynamic than the U.S. market. So, it's a tougher market to capture share. And particularly to capture share profitability. We're busy at work in Europe trying to diversity our footprint there. We're investing a bit more in business development, but also diversifying our product footprint and that's why we're focusing a fair amount of our resources in building an embedded modules business there.

John Bright. The second question. Your expectations are high on the USB form factor. What do you think it is about that form factor that has got the expectations apparently by the carriers and yourself so high? Well, you know part of it is grandma knows USB. It's a very familiar connectivity method. PCMCIA seems to have a bit of fear factor; I guess when it comes to markets beyond enterprise. Everybody knows USB. Everybody knows memory sticks. It's a common connectivity form factor. So, it kind of takes a bit of the fear factor out. It shows better in retail, as well. And you know, beauty on the shelf is an important thing in retail. Our USB device as an example has a very different industrial design. It's intended to appeal to users beyond enterprise class users. And certainly it does open up different opportunities in terms of devices it can connect to. USB can connect to a desktop, a router, your laptop. It can connect to myriad devices and I think all of that, just because of the versatility, because of the reduction and the fear factor, because it plays well in retail, I think those are all factors driving the appeal.

Dave, what was the $2.1 million, I think that was in the other segment?

It would be things like services revenue, for instance, would be the largest component. We also have some accessories revenue that would be in that component.

Okay. And my last question, gentleman. It's the [WIMAX] question. What size was Sprint as a customer this quarter and what's your take on the press releases they've issued regarding WIMAX? Particularly in the states, deploying to I think 19 markets beginning in late '07 and 19 markets in '08 and 100 million [inaudible] coverage. What's your thought on that and how does Sierra Wireless play there?

Well, you know, we're Sierra Wireless. We're not Sierra Cellular, so we're paying very close attention to WIMAX and candidly, John, I'm not going to disclose too much. But we've had quite a bit of early business development working WIMAX. We've had a fair amount of early research and development work in WIMAX and we have no disclosed product plans at this point and time. We're kind of in that odd situation right now where there are no WIMAX networks. I mean, there are no true mobile WIMAX networks deployed yet. They're coming, we believe, and we believe it's only a matter of time. So, for us, we're monitoring the time and assessing the business case as to when to enter. And probably a higher probability that we'll enter than not and assuming we will, it's really about picking the right time to enter WIMAX and how to enter WIMAX. And whether or not we do a vanilla WIMAX device or some kind of combo device. Obviously the fact that Sprint has been quite vocal on their WIMAX initiative. I'm sure it's no surprise to you that we've been speaking with them at length about their WIMAX initiative and we believe there is an opportunity there for us. It looks like the channel just got a bit crowded, even before the network has been built, with players like Samsung and GTE. But notwithstanding that, we think there's still an opportunity there for us to evaluate and hopefully make the right decision on whether or not we pull the trigger and go hard or wait for a different time.

Do you think this is going to be a form factor that will be a dual-mode card form factor initially that is WIMAX that is backwards compatible with EV-DO in this particular case? Because what we have seen the tricky technology transitions in that past and this is one where I'm just curious how you might think this is going to play out in that basis?

Yes. I think with operators who are currently cellular operators, who are adding WIMAX to the footprint, clearly I see an opportunity there for combination devices. And Sprint would fit that description pretty well. Conversely, I think there are other operators who are going to be pure WIMAX place and there may be less of a requirement that had cellular capability in that device.

And by the way, you focused in on EV-DO because you were talking in the context of Sprint and I would fully expect as you look farther out, there's going to operators who are operating HSDPA networks today who are going to compliment that with WIMAX and we'll have requirements for combo devices with HSDPA.

And Dave, I eluded to Sprint, what size customer were they this quarter?

We didn't disclose any percentage on Sprint.

They were below 10%, John.

Below 10%. Gentlemen, good quarter. Thank you.

Your next question comes from George [Edwonick] of CIBC World Markets. Please go ahead.

Thank you. Jason, following up on some of your comments about the embedded space, can you give us a bit of more color on the Cisco and the Ericsson announcement? And do you think that the non PC embedded can keep up with the PC embedded, growth-wise?

The latter question, I think so. Again, time is going to tell there, but I think it can. There are some really interesting emerging applications. The Cisco one has us quite excited and it has some operators quite excited, as well. You may have seen the release from Verizon where they've actually come up with pricing plans, specifically for route implementations. The early demand indications for this [WIC] module integrated services routers look really good. They're something like north of 2 million integrated services routers installed today and lots more being sold. And in this particular option, this 3G backup option is compatible with every one of them. So, I think there's a pretty interesting embedded base to sell in. It seems like a pretty it's a pretty easy return on investment sale for Cisco sales guys and any type of operators like Verizon building specific service pricing plans for that solution. So, I'm bullish, but we'll have to see how that plays out.

On the Ericsson side, you know a very different marketplace. Their fixed wireless terminal devices are sold mainly into small and medium sized businesses and we've actually even seen implementations where their W25 is actually the hub for a home and delivers all of the voice functionality, all of the broadband functionality, all of the fax functionality required by that resident. So, that device fits in a very different segment of the market and I think that had to play also in different geographies. So, how big can it be? We'll wait to see. Intuitively we believe it's a big market and we think we've got our bets placed in the right places in routers and fixed wireless terminals for embedded modules and with laptop and mobile computing players with embedded modules.

And following up on Ericsson, do you view them as a competitor also in the module space? I recall some announcements from them that they participate on that front.

We do. Ericsson is a massive and diversified company, as you know. And the group we're selling into right now is a group called Ericsson Enterprise. The group that's doing a module, a 3G embedded module is Ericsson Networks. So, it's a different business unit. Notwithstanding that, we certainly have to take them seriously as a potential competitor, both within Ericsson Enterprise and within our other markets. So far so good though. We've seen the press release, but really haven't seen them out in the market in any meaningful way.

And Dave, a few housekeeping questions. The $800,000 stock option expense in Op Ex, can you give the split by R&D and sale and marketing and administrative expenses?

[Inaudible]. In cost of goods sold, there was $100,000, sales and marketing $100,000, R&D $200,000 and administration $500,000.

Okay. And the tax rate; is there any changes to that going forward?

No. We are at roughly 22% Q1, I should say and that's consistent with where we were in Q4 and I would range it between 22% and 25% this year.

Okay. Thank you very much.

Luke, we'll take one more question.

Your last question comes from Mike Abramsky of RBC Capital Markets. Please go ahead.

Yes, thanks for taking my question. Jason, if you just go back to the customer concentration issue? It would appear that about 60% of your PC cards are in A T & T and Verizon. And I guess I'm trying to understand, given that this is sort of, as you acknowledged, kind of a risk and certainly you're doing very well despite the risk. But you have sort of two carriers subsidizing each other in a war for 3G HSDPA versus EV-DO. How would you characterize how long that's sustainable? You're clearly benefiting from that now, but if one of them were to, as you say, change ASP strategies or change their subsidy or etcetera, that obviously can have a major impact on your momentum. So, what are the risks of that occurring?

I think you're looking at the wrong metric there, candidly. Operators always want to keep their cost of acquisition low, whether or not they're subsidizing to $100, $50 or zero. So, if they change their subsidy strategy from whatever, quarter to quarter, I don't see that having an impact on our business. Where our competitive pressure comes is just from the simple fact that operators want to keep their cost of acquisition as low as possible and by direct result, they prefer lower cost of goods. Now, they've got to weigh that against quality, customer experience and time to market. That's the same battle we've been fighting for years. But I don't see that landscape as changing in any material way, based on changes in subsidy strategy.

I really wasn't referring to just subsidy. I was only using it as an example. I was more and more broadly just asking, for example, Option has HSDPA. European, North American roaming. You do not. What happens at Cingular if they decide to go to Option when their stocks of your cards are done and therefore your high exposure to that one carrier? How would you characterize the risks of that to what seems to be the bulk of what's driving your momentum right now?

Mike, I'm not sure where you're going. First of all, I characterize your comment as wrong. We have products that roam globally, just like Option has products that roam globally. I think what you're zeroed in on is what's the risk of customer concentration? And I said it earlier. The good news is we have really big customers. The bad news is we've got really big customers. So, what are we doing with respect to managing the risk of customer concentration? And I've already shared with you what our answer is there. We're adding new customers. On the OEM side and in different OEM segments, we're adding more operators and resellers of our adapter products. We bought AirLink and we're diversifying into a new market. And we're diversifying our product footprint, which mitigates our risk within these big carrier channels. A T & T is a great example. Sprint is a great example. We now just doubled our product footprints in those channels. That makes us stickier and it mitigates our risk. If we have a change in our AirCard business with Cingular, well, we don't go to zero now. We've got a USB product in that channel. And maybe another product in the future, as well. That's what we're doing to mitigate the customer concentration risk. And in the meantime, guess what? It's helping us grow the top line of the Company pretty nicely and growing the operating margin pretty nicely.

I guess I was under the understanding of two versions of HSDPA, Americas and EM EA. So, whereas a card-like option obviously addresses that issue.

No. The AirCard 875, which as you know we went through a technology transition on from the 860 to the 875 back in Q3. 875 is a global roaming card.

Okay. And the margins that you're talking about where you see stable margins, going forward, is that including the acquisition, the impact of the acquisition?

No. I was speaking really around our core business. Now, when I mentioned looking beyond Q2 and the fact that we see more positives coming into the gross margin formula, that would certainly include the acquired assets of AirLink.

Okay. So, excluding that, where do you think gross margins will go? I guess you really said it -- I think you talked a little bit about it earlier, but.

I think they're stable and I think even within our core business we've got some pretty good things happening, with respect to gross margin and we're improving the business, Mike, by diversifying into other areas and adding higher gross margin products, like AirLink.

So, I feel pretty good right now about the stability of ASPs in our core business and our trajectory on cost in the core business.

Great. Thanks for answering my questions and again, congratulations on the great quarter.

Thank you.

Thanks, Mike.

Mr. Cohenour, there are no further questions at this time. Please continue.

Luke, that was our last question.

yes.

So, I'd like to thank everybody for joining today's call and usual, management's available here in the office if you should have further questions.

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