司亞樂 (SWIR) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Sierra Wireless, Inc., third quarter 2007 results conference call. (OPERATOR INSTRUCTIONS)

I would like to remind everyone that this conference call is being recorded on Thursday, October 25, 2007, at 5:30 p.m. Eastern. I will now turn the conference over to Mr. Jason Cohenour, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Brandi. And good afternoon, everyone. Thanks for joining the call today. With me today is Dave McLennan, the Company's CFO. As an agenda, Dave will read our forward-looking statements disclaimer into the record. I'll follow that with a business update. Then I'll turn it back over to Dave for Q3 financial performance and Q4 financial guidance. I'll provide a summary then we'll open the line for questions.

Now back to Dave for the reading of our Safe Harbor statement into the record.

Thanks, Jason, and good afternoon, everyone. 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 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. They're 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 fourth 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 can 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 of 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 cost and expenditures, 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 and that meet the needs of 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 described in our annual information form, which can be found on SEDAR and in 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.

Back to you, Jason.

Thank you, Dave. The third quarter of 2007 was a period of strong year-over-year growth, record quarterly revenue, record quarterly earnings, new product launches, and business diversification. During the quarter, we had record revenue of $111 million -- $111.5 million, representing a 4% increase over Q2 of '07, and a 112% increase over Q3 of 2006.

Our strong top line performance combined with improved gross margins helped us to drive earnings from operations of $11.6 million, our best results ever. Our Q3 earnings from operations of $11.6 million compares to $8.1 million in Q2 of '07, and $100,000 in Q3 of '06. Included in our Q3 results is a full quarter of contribution from AirLink, which contributed $9.5 million in revenue at a robust 53% gross margin.

We achieved important product milestones, including launches of EVDO and new HSUPA AirCards with operators around the world. We established a market presence in Japan, launching notebook platforms with a new OEM customer; experienced a significant improvement in customer concentration. We launched a new equity issue, which will help us to drive growth and to execute strategic acquisitions that drive gains and shareholder value, much like we have done with AirLink.

Looking forward, we expect that our current product portfolio, combined with new HSUPA product momentum, as well as strong sell-through and bookings, will help drive revenue growth and profitability during the fourth quarter of 2007.

Moving to specific updates on our product lines. I'll start with our AirCard business, which includes our USB products. AirCard sales were down approximately 13% compared to Q2 of 2007, and up 101% compared to Q3 of 2006. As you recall from our July 26 earnings call, Q2 benefited from extraordinary shipments of our 595U into the Sprint channel. Overall, we view our Q3 AirCard sales as strong and in line with end user demand.

We launched and began commercial volume shipments of our AirCard 595U to Verizon during the quarter. Our USB modems are now commercially available from three major US carriers: AT&T, Sprint, and Verizon. We launched and commenced commercial volume shipments of our new HSUPA, USB, and ExpressCard products to Telstra in Australia. And early in Q4, we launched our new HSUPA AirCard with AT&T in the US. In Q4, we expect to launch new HSUPA AirCard products with operators in the US and Europe. As in Q3, we expect revenue from sales of our USB products, including to operators such as Sprint, to be a significant contributor to our Q4 results.

Moving to specific business development highlights in our embedded modules business. Sales of our embedded modules were $27.6 million, representing an increase of 53% compared to Q2 and up 103% compared to Q3 of '06. Sales to PC OEM customers represented about 58%, or $15.9 million of our total embedded module sales during the quarter. We introduced our new minicard embedded modules for HSUPA networks during the first quarter of '07, and we began commercial volume shipments to OEMs in the third quarter of '07.

Fujitsu launched notebook platforms, incorporating our new HSUPA modules in Hong Kong on SmarTone and Vodafone and in Japan on the NTT DoCoMo network. The launch with Fujitsu on NTT DoCoMo marks our initial commercial entry into the potentially lucrative Japanese market.

I'm reasonably sure all of you saw Qualcomm's announcement yesterday introducing the Gobi Multi-Mode Solution for notebook OEMs. Qualcomm has made it clear to us that their path to the PC OEM market with Gobi is through their customers such as us and our competitors. Unfortunately, the news release lacked clarity on that point and was misinterpreted by many.

Gobi has been on our radar and we have already proposed it to some of our PC OEM customers along with our other module solutions. Our approach is to work with our PC OEM customers to select the best module solutions for their various platforms and markets. Our view of Gobi is balanced. On the one hand, Gobi enables us to economically expand our product offerings for PC OEMs, and on the other, we believe Gobi could lower the barriers to market entry for new competitors, including potential price leaders.

The competitive landscape with PC OEMs has intensified with the entry of Ericsson and now with other potential Gobi customers. We have earned a strong position and reputation in this complex nascent space and intend to compete for profitable business. I will point out that our design win, integration, certification, and commercial launch track record has been strong, and we continue to ship modules for platforms that we expect will be in the market through the first half of 2008. It is still too early to predict what the market share situation will be in the second half of 2008, when potential new competition enters the market.

Notwithstanding the competitive landscape with PC OEMs, we expect our overall OEM business to continue to grow in 2008, and beyond. Over the past 10-plus years, we have built a strong, highly diverse OEM business and have unrivaled experience in the space. We now have 45 OEM customers in total, representing a broad range of segments, including mobile computing, networking equipment, industrial handhelds, and MRM. We believe that the avenues for growth are many and we are investing to expand our position.

Moving to our mobile and M2M products. Mobile and M2M product sales were $9.8 million in Q3, up approximately 130% compared to Q2, and up over 600% compared to Q3 of '06. This increase is due primarily to a full quarter of revenue contribution from our mobile and M2M products acquired with the AirLink transaction. The integration of AirLink is well under way and on schedule. To date, integration costs have not been material. The AirLink transaction was strongly accretive in Q3, and we expect it to be accretive in Q4 as well.

Our view of the mobile and M2M market is that it is experiencing solid growth and is highly fragmented from a segment, channel, and competition standpoint. Due to the fragmented nature of this business, we believe it is fertile ground for profitable growth. Our plan is to invest in growing this business with new products and segments, geographical expansion, share gains, and potential M&A transactions.

Moving to some general comments. Overall, we're very pleased with our record Q3 2007 results, as they highlight continued strong revenue growth and improvements in gross margin, operating margin, and business model leverage. Our bookings during Q3 were strong and give us good visibility to Q4 revenue. Our channels also reported record sell-through during the quarter.

Looking forward, we believe that our robust demand outlook, new HSUPA products and business development execution will continue to drive revenue growth and improved profitability in the fourth quarter of 2007.

Back to Dave to review the Q3 results.

Great. Thanks, Jason. On to Q3 results. Our results are reported in US dollars and are in accordance with US GAAP. For the third quarter 2007, our revenue was a record $111.5 million. Gross margin was $33.1 million, or 29.7% of revenue. And our net earnings were $9 million, or $0.33 per diluted share.

Our results include $1.5 million of stock-based compensation expense, of which $140,000 is in cost of sales and $1.4 million is in operating expenses. The results also include $1 million of purchase price amortization associated with the acquisitions of AirLink in May 2007, and AirPrime in 2003. On a proforma basis, excluding these items, net earnings were $10.9 million, or $0.39 per diluted share.

Our cash balance at the end of the quarter Q3 was $102.8 million, which includes the generation of cash from operations of $14.2 million in the quarter. Subsequent to quarter end, our cash balance increased to approximately $184.5 million, after the closing of the financing on October 2.

Relative to the guidance we provided for the third quarter of 2007, revenue of $111.5 million was better than our guidance of $109 million. Earnings from operations of $11.6 million was better than our guidance of $9.4 million. And net earnings of $9 million, or $0.33 per share, was better than our guidance of $7.6 million, or $0.27 per share.

Comparing our Q3 results sequentially to Q2, revenue increased by 4% to $111.5 million, from $107.4 million in Q2. This increase was driven primarily by an increase in our OEM and mobile and M2M products, offset by a decrease in our AirCard products. USE products -- USB products contributed $45 million or 40% of our Q3 revenue, as compared to $48 million or 45% of our Q2 revenue.

During the quarter, AT&T, Sprint, and Verizon each accounted for more than 10% of our revenue. In an aggregate, these three customers represented approximately 51% of our revenue. This was a significant reduction in our customer concentration compared to Q2, where AT&T and Sprint collectively represented 63% of our revenue.

Gross margin improved to 29.7%, compared to 27% in Q2. This improvement reflects a favorable product mix, a full quarter of AirLink contribution, product cost reductions, and solid ASP discipline. Our operating expenses increased to $21.4 million, from $20.9 million in Q2. This increase was driven by the inclusion of AirLink operating expenses for a full quarter, and product launch expenses related to new product introductions, partially offset by a reduction in certification costs. This resulted in improved operating leverage in Q3, as operating expenses as a percentage of revenue decreased to 19.2% from 19.4% in Q2.

Earnings from operations increased to $11.6 million from $8.1 million in Q2, resulting in an increase in operating margins of 10.4%, up from 7.6% in Q2. And net earnings increased to $9 million, or $0.33 per diluted share, up from $6.7 million, or $0.25 per share in Q2.

Looking at some key balance sheet items as compared to the previous quarter, June 30. I spoke about cash earlier. In Q3, accounts receivable remains stable at $69.1 million, and DSOs were 45 days at the end of the quarter, down from 49 days at the end of Q2. Inventory also decreased during the quarter to $28.4 million, from $36.1 million. This reduction is mainly due to a decrease in CMA inventory.

Looking at revenue by product line, comparing Q3 to Q2, revenue from AirCards was down 13% to $72.7 million, representing 65% of our total revenue. OEM was up 53% to $27.6 million, representing 25% of our revenue. And mobile and M2M was up 130% to $9.8 million, representing 9%. And other revenue was 1%, or $1.4 million.

Within the embedded module product line, sales to PC OEMs were approximately $15.9 million, up 55% from $10.2 million in Q2. Our non-PC OEM sales were $11.7 million in Q3, up 50% from the $7.8 million in Q2.

Looking at revenue by geography, again Q3 compared to Q2. Revenue in the Americas was down slightly by 2% to $80.3 million, representing 72% of our business. Europe was down 23% to $9.2 million, representing 8% of our revenue. Asia Pac was up 59% to $22 million, representing 20% of our revenue. With respect to the 2% increase in sales in the Americas during Q3 compared to Q2, I note that our Q2 revenue had benefited from extraordinary shipments of our AirCard 595 USB modem to -- into the Sprint channel. We believe our Q3 sales are at a normalized level. Compared to Q3 in the prior year, our sales in the Americas increased 137%.

In Europe, the 23% decrease in sales compared to Q2 as a result of decreased AirCard sales and of the launch of new HSUPA products in Q4. Compared to Q3 of the prior year, our European sales were up 27%. We expect sequential revenue growth in Europe in Q4, as we have launch commitments in place from European operators, for our new HSUPA AirCard products.

In the Asia Pacific region, the 59% increase in sales compared to Q2 is primarily the result of increased AirCard and OEM sales. Compared to Q3 of the prior year, our Asia Pac sales increased by 93%.

Moving on to guidance for Q4. We're providing financial guidance for the fourth quarter ending December 31, 2007. This guidance reflects our current business indicators and expectations. Our guidance for the fourth quarter reflects strong demand and good revenue visibility. This outlook is constrained by expected supply shortages on key components.

Similar to the third quarter, our guidance for the fourth quarter includes a significant revenue contribution from expected new product and channel launches. There are uncertainties associated with the launch and early ramp of new products that could affect our ability to achieve guidance. As a result of our anticipated new product launch activity, we expect our fourth quarter operating expenses to increase relative to the third quarter.

Inherent in this guidance are risk factors that are described in detail on 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.

On a GAAP basis, Q4 guidance is as follows: revenue of $125 million, up 12% from Q3; earnings from operations of $12.8 million; net earnings of $11.1 million, resulting in $0.35 per diluted share. On a proforma basis, excluding stock-based compensation, as well as purchase price amortization and integration costs associated with acquisition activity, our non-GAAP proforma guidance is for revenue of 25 -- $125 million. Proforma earnings from operations of $15.5 million. Proforma net earnings of $13.1 million, or $0.42 per share.

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

Thanks, Dave. Our results for the third quarter illustrate the continued momentum in our business. We achieved record quarterly revenue, volume, and earnings. Our business model leverage continued to improve as we lowered operating expenses as a percentage of sales to 19.2%, and delivered an operating margin of 10.4%, compared to breakeven a year ago.

We launched important new products, such as USB modems and ExpressCards for HSUPA networks, and expanded our product footprint in key customer channels. We opened an important new market launching our first products in Japan. And our diversification into M2M gained steam as AirLink contributed a full quarter of highly profitable revenue.

I believe that our market continues to experience a strong rate of growth, as more and more users adopt the compelling benefits of mobile broadband connectivity. We continue to benefit from this trend. And as a result of strong execution, expect to outpace the market growth rate again this year, growing revenue approximately 94% in calendar year 2007. This growth comes after delivering 107% revenue growth in calendar year 2006.

We are entering Q4 with continued momentum, given strong demand and record reported channel sell-through. We expect that this momentum, combined with good visibility and the launch of new HSUPA products will help drive continued revenue growth and improving profitability in the fourth quarter of 2007.

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

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (OPERATOR INSTRUCTIONS) Your first question comes from George Iwanyc of CIBC World Markets. Please go ahead.

Congratulations on the results, guys.

Thank you.

Jason, can you give us an idea of what the initial response has been by the laptop vendors to Gobi and also on the carrier side as well?

Well, I think I'd say balanced, much like our view, George. There are a couple of operators, and you saw their supporting quotes in the Qualcomm release, are very enthusiastic about Gobi as it bridges an important technology barrier between two companies that share a financial interest.

And with respect to the laptop OEMs, I'd say that it's mixed. Some are embracing the concept fully and are looking forward to a more simplified integration and being able to have platforms that can work on multiple networks, and others who are perhaps more focused on certain regions, you know, it's less of a -- less of a good play.

And based on what you understand right now, how do you think this would impact your margin structure for embedded and pricing?

You know, I think it's still too early to tell. Right now we've proposed Gobi alongside our other module products. Our gross margin in the laptop sector in general is -- tends to be a lower gross margin business for us, compared to, as an example, our AirCard business or our vertical OEM business. So whether or not those gross margins will go down -- by the way, I don't see them going up as a result of Gobi. But whether or not they go down really remains to be seen.

Okay. And just following up on that. You saw this on growth and embedded. Do you see that kind of turning the corner in acceptance at this point?

In overall --

Yes.

-- absolutely. Yes, our view of the OEM business in totality, including the PC OEM part of it is that it will continue to grow.

Okay. And one final question. Dave, can you give us what the proforma R&D, sales and marketing, and G&A expenses are?

Sorry. Proforma --

For the stock option.

Oh, sorry. Sorry, I didn't hear you there, George. Sure. For Q3, in cost of goods sold, $100,000. These are rounded numbers, George. Sales and marketing, $300,000. R&D, $300,000. And administration, $800,000. Totaling $1.5.

Okay. Great. Congratulations again.

Thanks, George.

Thank you.

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

Thanks. Congratulations on a good quarter. Jason, a question for you, and then, Dave, one for you as well.

Jason, so last week we saw Ericsson kind of lower their numbers based on the expectation that carriers in the Western world were not upgrading their networks or expanding their networks as fast as they had thought. Just wondering, what impact do you have -- do you think this is having on your business? Is it marginal because the fact that they've already rolled out their HSUPA networks means that they need to capitalize on them using applications such as the ones you guys are selling? So I wouldn't mind your thoughts on that.

And then, Dave, just you continue to do very well in the face of a very strong Canadian dollar. Can you just give us a sense of how much longer you can keep that up? Is the Canadian dollar hurting you? How much has it hurt you so far? And what are the prospects going forward?

Sure. With respect to the Ericsson momentum and their recent -- their recent announcement of results and commentary, Gus, we see no impact of that perceived slowdown on our business. In our view, there is already critical mass coverage deployed of mobile broadband connectivity, and, in our view, that deployment does continue and we continue to benefit from that. Dave.

With respect to FX, George -- or Gus -- sorry -- the -- so if you look at our Canadian dollar expenses, we probably, for every $0.01 change in the dollar will probably negatively impact our EPS by approximately $0.025 is the sensitivity. So that would be the OpEx sensitivity.

We also have in our other line below earnings from operations, in other income, we also have FX gains or losses at any given time on our financial assets; for inference it's our cash balances. So in the Q3, we had approximately a $300,000 FX loss included in that other income line. And that will vary depending on how much of our liquid assets are in Canada versus the United States or elsewhere.

Can you just -- sorry. Can you give me an update of what your headcount is and what proportion your headcount is in Canada currently?

Yes. In total we have 399 people company-wide. I would say approximately half of that would be in Canada.

Thank you very much.

Okay.

Your next question comes from Ray Sharma of GMP Securities. Go ahead.

Thanks. Thanks for taking the question. So solid quarter, guys. I just had a couple questions; one in regards to M&A (inaudible) scenarios; and then the second question back to Gobi again, unfortunately.

So the first question just on the M&A side. Can you just flesh out a little bit about what areas, if you were to look at your existing lines of business, is there some sort of guidance you can give us as to what areas you'd focus on? Specifically, if you can maybe comment on the ability to take AirLink, which is clearly a very strong earner, very synergistic with your business; is there other acquisitions that could complement AirLink, potentially even extend the business to a hosted type of solution? How far would you go? I just want to get a sense as to your parameters.

Sure. I'll give you some commentary on that, Ray, being very careful not to give too many competitive heads-up on what our M&A activity is.

I can tell you in general our M&A activity is much more organized than it ever has been. We've organized now around the activity. We've got specific areas of our business that we're looking at and exploring M&A alternatives in. Some of those are in M2M, some of those are in our core business, and -- our core mobile computing business.

And with respect to AirLink in particular, in leveraging them as a platform to do further consolidation in what we view as a highly fragmented market with no dominant player, yeah, we see it as a great vehicle for that.

It's a good segue for the Gobi question, because I just want to understand a couple things. Like given that you've already given quotes with and without that particular product in the solution, what is it -- what has changed as far as, you know, you look at the quotes that you get with it -- and not that that's what the customer's accepted in price just in terms of your proposed pricing -- what's happened to the actual addressable dollars within the overall solution?

I'm not sure if I understand that question, Ray.

Our content.

Our content in the overall --

Yes, it is content.

Yes. I, you know, I'm going to be careful again not to specifically comment on that. But I would say it's consistent. You know, a module is still going to be a very small component of the overall [VAM] of a laptop computer.

And how much of that percentage of the VAM -- like your addressable of the -- of the actual laptop module -- or sorry -- the wireless module, what I'm specifically wondering, the Sierra Wireless value added part, what -- has the percentage of that changed at all?

Well, I think you're talking a little bit -- you're kind of talking about our gross margin and perhaps our value adds. Well, I'll comment on both of those separately, actually. No, our gross margin in laptop OEM land tends to be in the low 20s. We've been very forthright on that, so it is significantly below our corporate average. With respect to the content that we would bring with a Gobi solution versus the content we would bring with an organically developed module here at Sierra Wireless, definitely less with the Gobi solution. There's less R&D investment required. So we don't have that hitting our OpEx. All of the -- most of the service value adds that we provide after development, such as integration support, certification, antenna design, and things of that nature, would still stand with Gobi. But some of the more, you know, in-the-guts custom developments would not, such as firmware development and custom APIs, et cetera.

Great. And thanks for answering the question. Maybe just as a close, you can help us contrast what the difference is in the competitive dynamic before and afterwards. In other words, when we talk about Ericsson, Ericsson was another vendor that's attempted to get into the PC market -- card market in the past. Can you maybe just contrast? And thanks very much.

Yes. I think I'll stay consistent with my previous statement. That in PC OEM land, the competitive landscape, it's always been pretty competitive, but I'd say it has intensified. It's gone from a, basically a two-player landscape to now include Ericsson and now include potential other customers of the Qualcomm Gobi initiative.

So I think just in terms of number of competitors that that has gone up in PC MO -- OEM land. And like I said, we're going to continue to compete for the profitable business and rely on our experience and track record in bringing laptop OEMs to market and doing an awful lot of the heavy lifting with respect to integration and certification.

Thank you.

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

Thank you. Good evening. Congratulations on a good quarter and guidance, gentleman. First in the quarter, the R&D spend was a bit lower. Dave, can you address that first?

Sure. I think the biggest driver there, John, is in Q2 we had a lot of certification costs ahead of product launches in Q3, and in Q3, we're a little lighter on cert costs. So that would be the -- one of the -- one of the big differences on the R&D side.

Okay. And can you address the component constraints that you talk about? What type of components are you expecting or are anticipating you might have difficulties with?

There are -- I'm going to be -- this is Jason, John. I'll be not specific on that, and -- but I will point to it's a small handful of key components. It's spread across both technologies, EVDO and HSUPA. And with respect to what's driving that, those component constraints, there are myriad reasons. But without getting into a lot of detail, the common theme is increasing worldwide demand.

Okay. And bouncing around here, talking about Qualcomm's new product, what, Jason, what do you think the addressable market is for a product of that nature, to be able to operate on both networks?

Well, I think I would size the addressable market the same way we've been sizing the addressable market for the laptop OEM space in general. It's really the same. So this year that's approximately 80 million new laptop computers, next year maybe it's 90 million new laptop computers worldwide.

Well, don't you think that's going to be a higher-priced product because of its capabilities?

Well, potentially. But I wouldn't -- I wouldn't immediately jump to that conclusion.

Okay.

I think one of the -- so one of the key things that Qualcomm is trying to do in working with its customers is not only bring unique capability for multi-mode, but also to be very cost competitive.

And let me -- let's be clear about that as well. Qualcomm anticipates selling this product through its existing customers, not directly; is that correct?

That's correct.

Okay. In your prepared remarks, you talked about visibility. And, Jason, I think you mentioned a second half '08, potential new competition. Is there something on the screen that's causing you to mention that?

Yes. Well, the only thing that's on the screen there, John, is some of the new names, right, so competitive customers of Gobi and Ericsson. And our view is whatever traction they get in the market, if there are design wins that we don't get, probably see those laptop platforms in the market late Q2 or more likely sometime in the second half of '08.

Okay. And then, Jason, on -- it wouldn't be a call if I didn't ask you about your WiMAX thoughts today. The saber rattling continues in the marketplace. We don't see an up-and-running mobile WiMAX network today, but Sprint continues to hold fast on an April launch in some markets. What are your thoughts on how that market might develop and how Sierra's going to participate?

I think it's -- I think the train has left the station on WiMAX. And it's going to happen. It's just -- it's really a question of timing here. With respect to Sprint, they're undergoing a leadership change. There's been some speculation as to whether or not that will change their WiMAX plans. We're not planning that those plans will change. So we are still expecting Sprint will deploy WiMAX as they've already -- as they've already expressed to the marketplace, and that is driving some of our R&D efforts. I think it's coming.

Okay. The last one for you, on the USB modems that are out today with memory stick and security and/or security capabilities, your thoughts on those additional functions.

I think they're potentially -- they're potentially interesting. And furthermore, I think the USB platform provides additional very interesting opportunities for differentiation and adding different functions to that platform. It is one of those ubiquitous platforms on which a lot of functionality is delivered to the marketplace. And so we see some interesting opportunities there.

Okay. Thank you.

You bet.

Your next question comes from Samuel Wilson of JMP Securities.

Good afternoon, gentlemen. Just a couple very small questions. First, to revisit the component shortage issue, can you clarify, is this a Sierra specific issue or do you think it's an industry-wide issue?

I think I'll stop short of saying it's an industry-wide issue. But I'll certainly say that I'm quite certain that there are other OEMs like us who buy those same components.

Perfect. So -- okay. Good answer. Second, recently in the marketplace there's been a lot of speculation about low-cost Asian competitors mysteriously sort of showing up here any second. Have you noticed any change at all in terms of competitive environment? And can you wrap into the answer sort of your discussion around ASPs with the carriers? Have you noticed any change in tone in either one of those areas?

Well, I think the presence of low-cost Asian suppliers has been, I mean, that's been a constant in our business, right. We've had it in our business for years now. Huawei is a well-established player in the European market, as an example. Pantec is a well-established player in the US.

So I think the -- I think the threat of low-cost Asian competitors entering is no longer a threat, it's here and we're competing against them every day.

So has that intensified the environment in the last year? Yes, I think we've been very forthright on that. We -- it has been an intensely competitive environment. But it's no less -- it's no more competitive today than it was a year from now. And in fact, you know, is there pressure on ASPs? Yes. But our ASPs have been very stable. After a significant change in the first half of '06, our ASPs on both AirCards and embedded modules actually has been, as family groups, has been virtually flat for the past year.

Just let me ask exactly the question. I understand the Asians have been here for a while. I guess what I'm asking is, in the last 90 days, or would you expect in the next 90 days any sort of material change in the competitive environment?

No. No. I mean, other than the increased intensity in the PC OEM space that I've already referred to.

Right.

But we don't -- we don't foresee any material change.

And then one last question. Can I just get what CapEx was for the quarter?

Dave is digging that out.

I didn't mean to stump him. I'm sorry.

That's okay.

It was approximately $2.1 million.

Perfect. Thank you so much gentlemen.

You bet.

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

Yes. Thanks very much. With regard to what is becoming a dead horse on the call, but I apologize, Gobi, just how much does price, since you're saying there's a possibility that there could be increased OEM competitive risk, how much does price matter to OEMs and what is your stance on maintaining market share or margin if that competitive position from, as you say, those pricing leaders does intensify?

Yes, I -- well, price is always a key attribute, Mike. It's always a key part of the decision-making process. And, you know, if there's a materially lower price thrown out there by a competitor, laptop OEMs take notice. It's not a -- laptop OEM land is not a high-margin segment, right. So laptop OEMs are always very careful with product costs. So product price is an issue, and we need to be competitive. But I'll make it clear, just as we have done in the past, our focus is going to be on winning the profitable business.

Okay. So the -- does the potential pricing pressure or possible, because it may not come through, as you say, or it might, does that apply -- does that kind of swing back to your -- to the whole OEM business, do you think, that this dynamic could, by introducing these new competitors impact margins in OEM modules in general?

I think in the -- if you look at our business in two buckets, Mike, the non-PC OEM, which is growing nicely, and the PC OEM, which is growing nicely, I think that risk is lower with our non-PC OEM customers. They tend to be customers who are lower volume -- lower volume, higher price, stronger gross margin, very fragmented markets. So for us they represent good opportunities to really demonstrate our value, get paid for services and sell modules at a good gross margin. And I see less of a threat there. Clearly, in PC OEM land, you know, lower pricing from competitors may put pressure on gross margins in that segment. But it's always been a low gross margin segment for us.

Okay. Could you give us a sense of what you see as the size duration of the UPA cycle as compared to the DPA cycle? And a little bit maybe of color of what's going on right now for you in UPA. I assume it's channel-fill, for example, on the AT&T side, since they really only just recently announced commercial availability. Could you give us a bit of color on what you see there going on?

Yes, I do -- I do see operators moving quite rapidly to UPA, or at least UPA devices, even if their networks aren't UPA capable. And you're right, because it's a -- we're entering a new product launch cycle, undoubtedly there's going to be the benefit of some channel fill there as operators equip all of their -- all of their channels with the new UPA capable product.

With respect to the cycle on UPA, how long the life cycle will be, gosh, you know, our next step after this generation of UPA is something called UPA-Plus. And that'll happen for us sometime next year. And then beyond that, we're looking at technologies like LTE.

I guess what I was trying to gauge is, are you seeing sort of the same per -- business channel per store fill dynamic for UPA as what occurred in the early phases of DPA?

Yes, at least as much, if not a bit more of a -- a bit more of a push, I'll say. So I think the expectation of demand is significantly higher.

Okay. Good. And then lastly, this comment you made on USB additional functions, which was a little bit of a pleasant tease there, are you -- are those as material as they -- in your view, as they -- what is obviously perhaps going to become a bar of including say local drive capability such as on the Novatel 727, or do you see these as sort of incremental?

I would -- I would view them as incremental, Mike, yes. I wouldn't -- I wouldn't expect anything revolutionary there, but it is a good platform to feature enhance on.

Okay. Thanks.

Not just with memory, but with other functions as well.

Thank you very much.

You bet.

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

Hi. Good evening, Jason and David. And, obviously, I think from listening to you guys on the quarter -- quarter-over-quarter has become a clich, so I'm not going to say that again for this particular quarter. Jason, quick question here in terms of I guess supply constraints. In terms of, I guess your quarterly release, the guidance in Q4 is set to be moderated by the supply constraints.

I would say that our guidance is already moderated by the constraints is the way to think about that.

Is already moderated you're saying?

Yes, these are already moderated. We've already factored into our guidance --

Yes. So --

-- the supply constraints.

That's right. So what I'm asking is, that is obviously a significant probability, I guess, unless I'm wrong, of this supply issues being resolved in Q4; is that -- because if it is resolved, then that moderation is going to go away and you will have you in a better (inaudible) result, which you may not see right now, but that is what I'm thinking about. Just wanted to find out whether those supplies issues for sure are (inaudible) for the next three months or there's a possibility of them going away.

Well, there's definitely a possibility of that. I mean, our guys are working on that virtually every day to improve the component supply situation. So I mean, I don't want to set your expectations to the upside, but that issue's definitely being worked hard. I would say that there is more risk to the upside than to the downside; in other words, we don't think the supply situation will degrade, but certainly we're working to improve it.

Thanks. And in terms of Japan, obviously, you have entered a lucrative Japanese market through the OEM channel. Any thoughts in terms of breakthroughs on the carrier side as a result of this?

Well, we're working on it, Dev. We have a -- we've got a small team in Japan now, and I was personally over there just a few weeks ago and met with a number of operators. It's a competitive market, but I think a market that's growing quite rapidly for mobile and broadband and I think we have opportunities there. I -- nothing's imminent in terms of a big breakthrough with a large operator, but clearly we see opportunities there and we're investing to seize those opportunities.

Thanks. In terms of AirLink, is there any kind of a similar seasonality quarter-over-quarter or, you know first half versus second half like we have in the traditional Sierra Wireless business, or can we assume that there is hardly any seasonality and we can kind of annualize based on the growth of (inaudible)?

I'd say typically there is similar -- I think there is a similar seasonality pattern. Now we, in our guidance, by the way, we haven't guided for bid growth in mobile and M2M. In fact, in our guidance, we've guided for mobile and M2M to be roughly flat.

I don't think that's typical though. I think in general a significant part of the -- of that market is public safety. And oftentimes what we find at the end of the year is public safety agencies find some budget money that they absolutely positively have to spend and sometimes the business benefits from that.

Okay. And in terms of the growth thrust for AirLink, is it within the existing region of AirLink, or you guys are essentially able to crack some newer regions?

Definitely we're focused on cracking new regions. AirLink had historically been a very North American-centric company.

Yes.

We're going to focus on growing our position in the North American space, but we fully expect to launch our products from that group in Europe next year, and we're very focused on expanding our presence in Latin America, which I think has good growth prospects for the AirLink products too.

Okay. Thanks. And one last question, I guess on my end. I guess one more housekeeping question for Dave in terms of technology breakdown. In terms of Europe itself, I mean, obviously the European contribution to Sierra's revenue for this particular quarter has not been all that great. I mean not that Sierra is fretting about it, even given the performance or whatnot. But even option has reported very lackluster growth, like a 6% growth based on its European-centric business. Like what's happening to Europe in general and has their overall business shrunk, or is it the third competitor taking most of the market share left?

Yes, I don't think -- I'll comment on the market growth in Europe. I don't think the market has shrunk there. I don't know that it's on -- I also don't think it's on the same growth trajectory as the US market. But the market overall there is healthy. And if you look at our results on a year-over-year basis, we're up pretty nicely year-over-year on a -- year-to-date on a year-over-year basis, notwithstanding some weakness here in Q3.

With respect to the competitive dynamic, it's a very competitive market. We've been very consistent on that. And I do think Huawei has some -- has some traction in what would have traditionally been option-only accounts. So I think there's definitely a competitive dynamic there that has hurt some of the incumbent guys.

Okay. And thank you. And just a quick housekeeping question. I guess a competent housekeeping question for Dave. Dave, if you can just give us the breakdown by technology, the share count, and any kind of differentiated tax impact that we should be considering as a percentage in 2008 versus 2007?

Okay. In terms of the technology breakdown, GSM technologies were 46% of our Q3 revenues, CDMA 53%, and other was 1%.

From a tax perspective, Dev, we recorded a 27% in this quarter, and that should put us on a trajectory for 25% for the entire 2007 year. Now, we are, as our profitability heats up, as you've seen over the past four or five quarters, you should expect that 2008 tax rates will go up. It's a little early to tell just how the segmentation will be between our various legal entities. But I would say we would be somewhere between 30 and 35%.

Okay. Thanks. And in terms of the -- may I have the share count, please?

The share count that's embedded for guidance purposes here in these numbers is an average share count of 31.5 million -- sorry -- 31.5 million for Q4.

And for Q3 it was? I don't know if I kind of missed that in here. Okay.

It's at the bottom of the press release.

Okay. Thanks for taking my questions. Jason and David, all the best to you.

Thanks, Dev.

Thank you.

Your next question comes from Kevin Dede of Morgan Joseph. Please go ahead.

Hi, guys. I -- my feeling is great results deserve the acknowledgement. So congratulations.

Thanks, Kevin.

Thanks, Kevin.

I was hoping you wouldn't mind commenting on the 125 that you have expected for the fourth quarter and how you might look at that in terms of technologies. Given that you're expecting to see more UPA in the fourth quarter, just wondering how you expect that mix to shift.

Yes. I don't -- well, we generally, Kevin, don't give guidance on a per-technology basis. But I think you're reading the situation right. We should have some HSUPA momentum in the quarter. We are expecting growth out of Europe. We're expecting growth out of our UPA customers in the US as well. So that will -- that, as a percentage of our overall revenue is likely to drift up a little bit. But I -- I'm going to fall short of giving you a specific number.

Fair enough. Would you expect that to have favorable margin implications, given that it's the cusp of a new technology introduction?

Generally not. On new technology introductions and early ramp, generally the initial product shipments are burdened with a lot of the early low-yield and other factory startup costs. So it is a cost-burdened product, typically, out of the gates. And then that normalizes after about a quarter.

Very good. Can you be at all more specific about how you might address the competitors, smaller form factor, in terms of your own product introduction and maybe more specific with regard to WiMAX and what you think the timeline of introduction from your end or from competitors' end on having a device to address not just WiMAX, but maybe an integrated CDMA WiMAX device?

Sure. Sure. First of all, on small form factor, clearly Novatel is out now with a small form factor USB. In our Q4 guidance, we do contemplate continued momentum with our own USB products, including with players like Sprint. And stay tuned, small and sexy is the game in USB, in addition to feature enhancements, and we're fully in the game. And we have been presenting to a number of our operator customers what that roadmap looks like. We've gotten favorable response. And I think if you stay tuned, we'll have some very, very competitive USB form factors in the market in late Q1, early Q2.

Okay. And with regard to WiMAX?

With regard to WiMAX, I'm going to fall short of giving you any specifics there, Kevin. Sprint's plans to deploy WiMAX have us very focused on that technology. It is driving some of our R&D activity. And I do believe WiMAX, whether it be multi-mode like you referred to with CDMA or single mode, is in our plans, and we're going to be careful not to reveal too much on our specific WiMAX plans right now.

Okay. Well, thanks, Jason. Last question from me, I guess would be, how would you characterize carriers' view of the holiday season in data cards and their own push to build ARPU on the back of greater introduction of USB and greater market acceptance of USB versus last year and how you might be accounting for that in your guidance?

Sure. Sure. Well, I think whatever momentum there that's driven by the holiday season is definitely contemplated in our demand picture for Q4. We do believe it's a factor. Over the last year, we've seen a pretty significant channel transition in our business from what had been historically a B2B play to now more of a retail and consumer play, it's now a significant part of the mix. And whenever you get into that consumer retail play with wireless operators, the holiday season becomes a key period. And so we do expect that devices such as ours will be part of that holiday push.

But obviously tough to quantify and -- but I guess what -- how would you sum it up, that you're considering that the carriers are going to make a big effort here and you've accounted for it?

Yes, I think that's the way to think about it.

Okay. Very good. Thanks for taking the questions, and congrats again.

Okay. Thanks.

Your next question comes from [Rob Miles] of [Sal Brothers].

Thanks. And, operator, this will be our last question.

Okay.

Hey, Jason. How are you today?

Good. How you doing?

Good. Could you guys talk about your relationship with Verizon? At this point, the Novatel and the Pantec are placed much lower than the Sierra USB. And was channel fill up to what you had expected at Verizon and going forward in Q4?

Yes, I think our relationship with Verizon is good. Verizon was a 10% customer in Q3. They were not a 10% customer in Q2. So I'd say with respect to Verizon, we've got products in their channels. We -- I would say our momentum there is not quite as strong as it is with players like AT&T and Sprint. However, we think we're fairly well positioned and I think we've got opportunity to grow our position in the Verizon account.

With respect to Q4, my expectation is that Verizon will be less of a contributor to our results in Q4 than they were in Q3.

And regarding Sprint and the possible Pantec rollout there, is that in your Q4 guidance as well, the thoughts of that?

All competition is -- all competition is factored into our guidance.

Okay. And the UPA at AT&T, can you kind of talk a little bit about your guidance there in Q4, to any AT&T channel -- you know, how -- if you could break down how big AT&T might be in Q4.

Well, it's -- I'm not going to give you guidance specifically for the AT&T account. But you saw that we had launched our new UPA AirCard with AT&T. So we are shipping commercial volumes of that product into the AT&T channel. That product is, I believe priced at zero with a two-year commitment. So clearly there's some promotional wood behind it. And our expectation is that before too much longer we'll get to launch additional UPA products into that channel.

Just one quick follow-up. As far as USB in Q4, do you look for the same type of growth that you saw in Q2 starting to grow, or do you see USB not being as big a part as it was in Q3?

It'll be -- it'll be a big part of Q4 is our expectation.

Okay. But I'm asking as far as the OEM verse the USB, obviously OEM was the upside here in Q3. Will USB have some growth in Q4 comparative to Q3?

Our expectation is that we will have strong growth in Q4. I'm going to be careful not to give you a guidance on specific customers or products. But we do expect USB to be a strong contributor in Q4, including with operators like AT&T and Sprint.

Okay. But you're not going to tell us whether Q4 over Q3 there'll be any upward momentum?

Correct.

Okay.

I think --

Thanks, Jason.

-- check -- I think it's clear in our guidance that there is upward momentum overall.

Thanks so much.

Okay. Thank you, operator.

Okay. Mr. Cohenour, I do -- there are no further questions.

Thanks, operator. That was our last question?

Yes, there is one question on the phone line. Would you like to take that?

Okay. We'll take one more, operator, and then --

It is a final question.

-- that's it, okay?

Okay. It is from Jeff Kyall of Lehman Brothers.

Wow.

Under the wire.

Wow. Unfortunately, it's not necessarily the most insightful question. But it seems as though, obviously, your customer concentration declined a chunk this quarter. I would imagine the acquisition was a major element of that. But I'm also wondering if over time we should be expecting the customer concentration to decline a little bit further?

Well, that certainly -- it's certainly our goal, Jeff -- I'm going to be careful not to give too much forward-looking forward view on that. But the dynamic in Q3 was certainly an improvement over Q2. And remember Q2 was abnormally high, I would say, with Sprint in particular, because we had a healthy channel full on the -- fill on the 595U. Q3 felt a bit more normalized and we had good contribution from the Big Three in the US. And as we look forward, we're going to still have our hands on the thing -- on the levers and dials trying to grow other channels and customers in our business, so that we continue to diversify the customer lineup and reduce risk, of course.

Okay. Well, steady progress there, so. Congratulations.

Thanks.

Mr. Cohenour, I do hand the call back to yourself. Please continue.

Operator, we're ready to end the call.

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