司亞樂 (SWIR) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Sierra Wireless, Inc. first quarter 2008 results conference call. (OPERATOR INSTRUCTIONS.) I would like to remind everyone that this conference call is being recorded on Tuesday, April 29, 2008, at 5:30 p.m. Eastern time. I will now turn the conference over to Mr. Jason Cohenour, President and Chief Executive Officer. Please go ahead.

Thanks, Eric, and thanks, everyone, for joining today's call. With me today is Dave McLennan, the Company's CFO. The agenda for today is Dave will read the forward-looking statements disclaimer. I'll provide a business update. Dave will run through our Q1 '08 financial performance, as well as Q2 guidance. I'll then summarize, and we'll go to questions.

And with that, I'll pass it to Dave.

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 the applicable securities laws. These forward-looking statements are not promises or guarantees of future performance, but are only predictions that relate to future events, conditions, or circumstances for our future results, performance, achievements, or developments.

They 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 and financial expectations 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 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, implied 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 among others our ability to develop, manufacture, supply and market new products that we do not produce today to meet the needs of customers and gain commercial acceptance, our reliance on the deployment of next-generation networks by major wireless operators, component supply limitations, the continuous commitment of our customers, and increased competition.

These risk factors and others are discussed in our annual information form, which may be found on CDAR and in our other regulatory filings within the Securities & 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.

Finally, forward-looking statements are based on management's current plans, estimates, projections, beliefs, and opinions. 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.

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

Thanks, Dave. In the first quarter of 2008, we experienced continued strong momentum in our business and achieved record quarterly revenue despite a challenging component supply environment and seasonality in some parts of our business. During the quarter, we grew revenue by 66% on a year-over-year basis to a record $141.9 million.

Our strong top line performance helped us grow earnings from operations by 106% on a year-over-year basis to $11.4 million. Our year-over-year improvement was driven by record quarterly sales of our PC adapter products, including USB and embedded modules, as well as the addition of revenue from products acquired in the AirLink transaction.

We also achieved an important strategic milestone in early April with the announcement of a definitive agreement to acquire CradlePoint, an innovative supplier of wireless networking products and docking solutions for mobile enterprise, industrial, and consumer applications. We believe the addition of CradlePoint Solutions will extend our offering and value proposition to mobile operators and vertical OEM customers.

Moving to specific updates on our product lines, I'll start with our PC adapter business. PC adapter sales increased approximately 11% compared to Q4 of 2007 and were up 64% compared to Q1 of 2007. Revenue from our PC adapter products was constrained as a result of component supply limitations during the first two months of the quarter. During Q1, our PC adapter business had particularly strong revenue contribution from AT&T, Sprint, and Telstra.

During the quarter, we were also awarded a channel slot for a future USB modem with a large Japanese carrier. This is our first PC adapter win in Japan and we expect to launch the product later this year. In Europe, we continue to supply our HSPA adapter products to several wireless operators. However, revenue was weaker relative to Q4 2007.

A significant factor in the Q1 weakness in Europe was the delay in an expected new product launch with a key existing customer. This new product has now commenced commercial shipments, and we expect quarterly revenue in this region to increase as we continue new product and channel launches. We also introduced two new HSUPA products, the AirCard 885 Express Card and the Compass 885 USB Modem. Compass 885 is significantly smaller than our previous USB models and has an innovative new industrial design and feature set. We have received launch commitments for the Compass 885 from operators around the world and expect to launch the product in Q3 of 2008.

On April 1, we launched our Compass 597 USB modem for EV-DO Rev A networks with Sprint. Compass 597 is the smallest USB modem in the market today and packs several innovative features including full GPS capability, onboard storage, and Tru-Install. We believe demand for the Compass 597 is strong and have now received additional orders from other CDMA operators, as well. We expect to launch the Compass 597 with additional operators in Q3 of 2008.

Moving to specific business development highlights in our Embedded Modules business -- sales of our embedded modules were $28.1 million, up 2% from Q4 2007 and up 56% compared to Q1 of 2007. Sales to PCOEM customers represented about 70% of our total embedded module sales during the quarter. And like our PC adapter products, revenue from our embedded module products was constrained as a result of component supply limitations in the first two months in the quarter.

Fujitsu Siemens Computers selected our next generation HSUPA modules to provide network connectivity to select models in their enterprise LIFEBOOK product line. In addition, NEC integrated our HSPA embedded module in their LaVie G notebook computer, which is now commercially available and certified on the NTT DoCoMo network in Japan.

We also secured design wins with three additional router manufacturers. During Q1, we introduced two new embedded module products, the MC8785V for HSUPA data and voice networks and the MC5727 for EV-DO Rev A networks. Both products will be commercially available later this year.

Notwithstanding the intensified competitive landscape with PCOEMs, we expect our overall OEM business to continue to grow in 2008. For the past ten-plus years, we've built a strong, highly diverse OEM business and have unrivaled experience in the space. We have over 50 OEM customers in total representing a broad range of segments including mobile computing, networking equipment, industrial handhelds, and mobile resource management. We believe that the avenues for growth are many, and we are investing to expand our position.

Moving to the mobile and M2M -- mobile and M2M product sales were $6.7 million in Q1, down approximately 38% compared to Q4 2007 reflecting seasonality and possibly some impact from macroeconomic headwinds. Notwithstanding our concerns about the macro economy's impact on this segment of our business, we do expect stronger revenue in Q2.

During the quarter, we introduced and commenced shipments of the new Raven XT in North America. We also introduced the growing mobile and M2M product line into the European market and secured CE registration on several models. Initial commercial shipments of select mobile and M2M products are expected to begin in Europe late in the second quarter of 2008.

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

Overall, we're very pleased with our Q1 2008 results as they highlight continued strong revenue growth in the face of a challenging component supply environment and macro economic uncertainty. Our bookings during Q1 were strong, and give us good visibility (technical difficulty) Q2 revenue.

Our channels also reported very strong sell-through. As we look forward, we are encouraged by the continued strong growth in our market segments, our proven ability to execute in a competitive environment, and the strategic opportunities that lay ahead. Our expectations for 2008 are for continued revenue growth, careful investment in our business, improving profitability, and further business diversification.

I'll now pass the call back to Dave for a review of the Q1 financial results.

Thanks, Jason. Our results are reported in U.S. dollars and are in accordance with U.S. GAAP. For the first quarter of 2008, our revenue was a record $141.9 million. Gross margin was $39.3 million or 27.7% of revenue and our net earnings were $9.7 million or $0.31 per share. Our results include $1.6 million of stock-based compensation expense of which $147,000 is in cost of sales and $1.5 million is in operating expenses. Also included is $1 million of purchase price amortization associated with the acquisitions of AirLink in May of 2007 and AirPrime in 2003.

On a pro forma basis, excluding these items, net earnings were $11.5 million or $0.37 per share. Our cash, short-, and long-term investments totaled $209.5 million at the end of Q1 '08, which includes the generation of cash from operations of $17 million in Q1.

Relative to the guidance we've provided for the first quarter of 2008, our revenue of $141.9 million was better than our guidance of $136 million. Earnings from operations of $11.4 million was in line with our guidance of $11.3 million, and net earnings of $9.7 million or $0.31 per share was better than our guidance of $9.4 million or $0.30 per share.

Comparing Q1 '08 results sequentially to Q4 '07, revenue increased by 4.7% to $141.9 million from $135.6 million in Q4. This increase was driven primarily by an increase in sales of our new HSUPA PC adapter products. Total USB sales in Q1 were $63.1 million or 44% as compared to $47 million or 35% of our Q4 revenue.

During the quarter, AT&T and Sprint each accounted for more than 10% of our revenue. At an aggregate, these two customers represented approximately 53% of our revenue. In Q4, AT&T and Sprint collectively represented 45% of revenue.

Gross margin of 27.7% was consistent with the 27.9% we had in Q4. Our gross margin remained stable in the quarter despite the product mix being more heavily weighted towards the high volume, lower margin USB product and the challenging component supply environment.

Our operating expenses increased to $28 million from $24.5 million in Q4, and sales and marketing, expanding distribution channels and support costs, as well as trade show activity associated with Mobile World Congress and CTIA, resulted in additional op ex.

In R&D, new product launch and development expenses, as well as an increase in the amount accrued for the repayment of government funding resulted in higher R&D expenses. As a result of this continued investment in our business, earnings from operations declined as expected to $11.4 million compared to $13.3 million in Q4, resulting in an operating margin of 8% compared to 9.8%.

Net earnings decreased to $9.7 million or $0.31 per share from $11.5 million or $0.37 a share in Q4, again consistent with our guidance for the quarter.

Looking at key balance sheet items compared to December 31, 2007, I already spoke about cash. Accounts receivable increased to $100.7 million from $83 million at the end December. DSOs were 54 days at the end of Q1 up from 52 days at the end of Q4. And late in the quarter, following the resolution of several component supply chain issues, we were successful in increasing inventory to $30.1 million from $25 million. This increase is primarily due to an expansion in HSPA inventory.

Looking at revenue by product line, Q1 compared sequentially to Q4. Revenue from PC adapter products was up 11% to $105.5 million in Q1, representing 74% of revenue. OEM was up 2% to $28.1 million, representing 20% of revenue. Mobile and M2M was down 38% to $6.7 million or 5% of revenue. And other was consistent at about $1.6 million.

Within the OEM product line, sales to PCOEMs were approximately $19.7 million in Q1 2008, while sales to vertical OEMs generated revenue of $8.4 million. Mobile and M2M product sales were down reflecting seasonality and possibly some impact from a slowing U.S. economy.

Looking at revenue by geography Q1 compared to Q4, revenue in the Americas increased by 10% to $96.9 million representing 68% of Q1 revenue. This increase was due primarily to sales of our new HSUPA PC adapter products. Compared to Q1 of the prior year, sales in the Americas increased 83%. In Q1, Europe was down 16% to $13.8 million representing 10% of revenue. Our revenue in Europe was affected by a delay in an expected product launch, but subsequently, since the end of Q1, we have now commenced shipments of this product. And compared to Q1 of the prior year, sales in Europe decreased by 14%. And finally, Q1 Asia Pacific sales were flat relative to Q4 at $31.2 million and compared to Q1 of the prior year, revenue grew 90% primarily as a result of increased sales to PCOEM customers and sales of our HSUPA PC adapters.

On to financial guidance -- we're providing financial guidance for the second quarter ending June 30, 2008. This guidance reflects our current business indicators and expectations. Our guidance for the second quarter reflects strong demand and good revenue visibility. For the second quarter of 2008, we expect our gross margin percentage to be stable compared to the first quarter of 2008.

As a result of our anticipated new product launch activity in Q2 and Q3, we expect our 2008 second quarter operating expenses to increase relative to the first quarter of 2008. 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.

So, on a GAAP basis, guidance for Q2 '08 is as follows. Revenue of $154 million -- that's 8% growth over Q1. Earnings from operations of $13.9 million -- that's 22.5% growth relative to Q1 and represents a 9% operating margin. Net earnings of $11 million -- that's 13.3% growth relative to Q1 and represents a 7.1% net margin. And finally, EPS of $0.35.

On a pro forma basis excluding stock based compensation and purchase price acquisition amortization, pro forma earnings from operations would be $16.5 million and pro forma net earnings would be $12.7 million, resulting in pro forma EPS of $0.40 per share.

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

Thanks, Dave. Our results for the first quarter of 2008 illustrate the continued momentum in our business and the importance of continued careful investment to drive sustained growth and market share. During the quarter, we achieved record quarterly revenue driven by record quarterly sales of our PC adapter products and embedded modules. We had strong reported sell-through and bookings in Q1 providing us with good visibility to Q2 revenue, and we signed a definitive agreement to acquire CradlePoint, an innovative supplier of wireless networking products and docking solutions.

Looking forward, we 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. As we look forward on the year, we're encouraged by the continued strong growth in our market segments, our proven ability to execute in a competitive environment, and the strategic opportunities that lay ahead.

While we are very aware of the overall macroeconomic uncertainty and are realistic about its potential future impact on our business, our expectations for 2008 continue to be for continued revenue growth, improving profitability, and further business diversification.

With that, Eric, we'll open the line up for questions.

(OPERATOR INSTRUCTIONS.) Your first question comes from George [Lowaze] from Oppenheimer. Please go ahead.

Congratulations on the strong results, guys. I believe you said that you were constrained for the first two months of the quarter. At this point, are you not constrained at all and have you made up and met any demand that was outstanding?

Yes. I think, as we said, George, the first two months, Jan and Feb, were pretty tough from a supply chain standpoint plus we -- our situation was exacerbated as a result of the Qualcomm injunction. So we kind of weathered both the supply constraints plus the transition to the non-infringing Qualcomm chips in the first two months of the quarter. And March we had a -- what I would characterize by the end of March a full recovery on the supply chain side. So, we feel like we have no visible supply chain constraints in Q2, at least none are expected at this point in time.

Okay. And looking at your guidance, can you give us an idea of how good your visibility into the next quarter or two is and what type of maybe backlog level you have?

Well, we don't disclose backlog level, but I -- again, directionally, bookings were very strong, sell-through was very strong, and we're off to a good start at the beginning of the quarter here. So, we feel pretty good with respect to visibility. We don't have a lot of reliance in Q2 on new product launches, although we do have some, and so we're feeling pretty good. We feel like we have most of the tools already available to meet guidance with respect to product availability and channels that are carrying those products.

Okay. And looking at the M2M [in the States], you mention seasonality and possibly some macroeconomic impact there. Do you expect much of a recovery in the second quarter and how difficult of a year do you think it could be in 2008?

Well, it's hard to say. We're a little disappointed with Q1, of course. Now, I'll highlight, though, that's coming off of a blowout second half to 2007, so I'm sure that has -- that colors our view somewhat of Q1. As we look at Q2, our forecast shows that we'll have a bit of a recovery, although not up to the levels we were in Q4 of 2007, and on the year, our expectation still is year-over-year growth for that segment of our business. So, just how much the economic weakness in the U.S. in particular is affecting that business, it's kind of tough to tell. It's more of a suspicion, if you will, on our part that economic headwinds are delaying some of those deals.

It's a very different business from our PC adapter business, which is -- on the PC adapter side, it's very, very low penetration -- very low market penetration, first of all, so you can, I believe, suffer quite a few economic headwinds and still have pretty good growth in that segment. With mobile and M2M, it's deal by deal, right? I mean, that is driven by large public safety or enterprise-oriented deals and in uncertain economic times, sometimes those deals slip.

So, while we don't have customers calling us and telling us, "Gee, because of the uncertain economic times we're pushing orders out," we suspect that could have been a contributing factor to Q1.

Okay. And do you anticipate much of a ramp in Europe that could offset some of the U.S. uncertainty?

We've got, I think, pretty measured expectations in Europe, George, and I think the impact there will be primarily in the second half. We'll get off to an initial start here in Q2, but I expect very small contribution in Q2 from Europe in mobile and M2M products. The second half, I think, we'll get a modest bump and kind of get our channels and our legs under us and get some customer trials going. And I think in terms of real significant contribution, I would look to 2009 there.

Okay, and one final question. Dave, can you give us what the splits of the $1.5 million of stock option expenses are in the various OpEx categories?

Sure. So, the total number for Q1 was $1.6 million of which $100,000 was in cost of goods sold; $300,000 in sales and marketing; $300,000 in R&D; and $900,000 in administration.

All right. Well, thank you very much and keep up the good work.

Thanks, George.

Thanks.

Your next question comes from Thomas Kucera from Avondale Partners. Please go ahead.

Good afternoon, Jason and Dave, this is Tom Kucera for John Bright.

Hi, Tom.

Hey. First question -- I wanted to talk a little bit more about operating expenses. It looks in your guidance as if the sales number there is pretty good, but there's some heavy expenses and it looks like operating expenses coming in there.

I think you mean Q1, right?

I mean --

We didn't break down what our OpEx was for Q2. Are you referring to our Q1 OpEx?

Well, I guess what I'm referring to Q2 and I guess I'm trying to get some better insight into maybe what's -- it looks like something, I guess, is weighing down EPS given your sales number there.

(Inaudible), Dave?

Sure. Tom, it's Dave here. As we grow the business, we continue to invest as you would expect, so from a sales perspective, that includes investing and expanding distribution channels and support costs and the other big driver of our OpEx is R&D. As we bring new products to market, we incur a lot of new R&D expense, including certification costs. And I guess the third factor in R&D is that we are booking a higher repayment of some government funding that is due and that's a -- that was part of the reason why R&D OpEx was up relative to Q4.

Can you talk about how big that government portion is?

Yes, we haven't disclosed that exact amount.

Okay. And then in terms of gross margins, and correct me if I'm wrong, but I believe you're set to where your gross margins on USB modems could be increasing with this new generation (inaudible).

Let me comment on that, Tom. I think with our next generation products, it's true we have a much better cost basis on those products, so with respect to having some positive leverage, if you will, on gross margin percentage, we think that gives us something to hold on to. If you remember our previous generation USB products, we brought to market via an ODM -- basically a turnkey ODM relationship, so that -- those products were somewhat cost burdened. Our next generation products, the first one of which we've just launched with our first customer, has a lower cost basis, and that should give us better capability to manage gross margin percentage on those products up, but I'll qualify that by saying we have to be vigilant on holding ASP, as well. And while the -- and while we're doing that, we also want to be careful to price these products to capture share and drive continued growth.

And do you expect a continuum -- and I guess we're kind of at a point where we're both -- we're at EBD of Rev A and HSUPA, expect to sort of continue to add incremental features and I guess Novatel, for example, they launched this nova speed, just talking about incremental features to try to add -- better preserve those price points.

Yes, I mean, definitely you see that in some of the products we just launched. I mean, they're definitely -- they're smaller, they're sexier, of better industrial design -- which, by the way, is absolutely a key differentiating factor -- but we've also piled on a bunch of user features. So I would expect to see a bit more of that from us.

But in addition to that, I wouldn't point to the wireless roller coaster slowing down at all with respect to changing AirLink standards and network deployments. We still see that as a very significant factor in our R&D mix, and certainly part of that's reflected in our R&D spending; right.

Okay. And the last thing I wanted to bring up was maybe if you could just characterize Sierra's global market share and where do you think that's been moving recently?

Well, we think it's been moving up, but we're pretty hesitant to put a specific market number on it. We leave that to the market analysts and financial analysts, like you guys. But if you look at the public results of our direct comparables, it would seem to indicate that we've been successful in capturing more share. The big unknown there is just how many devices is, you know, Huaway and Pantech and guys like that shipping. But overall I think our intuitive read is that we've been doing pretty with respect to share, and we think we've been growing faster than the market.

All right. Very good. Congrats on the quarter, and thanks for taking my questions.

Great. Thanks.

Thanks, Tom.

Your next question comes from Gus Papageorgiou from Scotia Capital.

Please go ahead.

Thanks. Congrats on a great quarter.

I guess the only slight disappointment in the quarter, though is -- just focusing on the OpEx for a second. Even though revenue is doing very well, both year over year and sequentially, the OpEx is kind of growing in line with or maybe even faster than the top line, and I'm just wondering do you see yourselves getting to a position soon where there's a lot more leverage in that OpEx or are you not going to have to grow as much to kind of get that extra revenue dollar? Because, I mean, if you could manage that the-- it would help your profitability quite a bit.

Yes, we know that. We have our calculators too.

No, it's a careful balance, Gus, and I can understand that we'll probably have some arched eyebrows on the OpEx increase, but we firmly believe that it takes OpEx to continue to drive growth and to continue to open up new channels and to continue to take share. But we also believe we can outpace OpEx increases with top-line growth. I mean, I don't have the numbers at hand here, but I'm pretty sure our OpEx hasn't grown 100% two years in a row, whereas our top line has, right.

So I think that our past two years provides clear evidence that we've been making good investments, and I believe we've been making careful investments, and that's been driving new product introductions and opening up of new channels, better programs to preserve and grow share, and we're not going to stop doing that. And, by the way, we firmly believe that with good top-line growth we can deliver great operating results as well.

I think it's part of the reason, Gus, why we're opening up a little bit of gap relative to our major competitors. Yes, OpEx is up, but so is share and so is our revenue relative to our other competitors.

Thanks for that, and I appreciate that. I'm just wondering, do you think that -- I mean, going forward, do you think there's more potential for -- now that your top line is growing nicely, do you think you're going to get at a stage soon where you can kind of harvest the existing OpEx without needing to increase it as much? I mean, or do you think you'll be needing to continue to grow that selling and marketing expense in order to continue to fuel the top line?

Yes, I think so, Gus. I mean, we had a pretty big bump up sequentially, as I'm sure you're observing, Q4 to Q1. I wouldn't expect similar bump ups in Q2 or Q3 or Q4. But having said that, I don't want to set your expectation that we're going to turn off the OpEx flow. We're not. But I do think we can moderate OpEx spend while continuing to drive top-line growth.

And just to put the Q2 guidance earnings-from-operations number in context, that delivers a 9% operating margin, so we've got a careful eye on profitability and balancing the spend to improve profitability.

You know, one more comment, too, on OpEx, and it speaks to my earlier characterization of careful spend. Quite a bit of our OpEx is actually not embedded in people or fixed recurring costs. So a certain part of our OpEx structure, if we needed to, we can dial back pretty quickly and without incurring a lot of expense to turn -- to dial back that OpEx.

Could you just characterize in a little bit more detail what it is invested in?

Well, we leverage partnerships wherever it makes sense, and by leveraging partnerships, that gives us a number of benefits, including very rapid deployment of resources in whatever area we may need them -- like channel support, as an example -- and an ability to dial that back quickly if we need to.

By the way, we don't have any plans to dial it back, but if we needed to, we could.

Okay. Great. Thanks.

Your next question comes from Dev Bhangui from Haywood Securities.

Please go ahead.

Hi, Jason and Dave, and congratulations on the quarter, exceeding the, I guess, the guidance and expectations.

Thanks, Dev.

Thanks, Dev.

Jason, my questions will be in two categories. First one is going to be on carriers. So here with respect to Sprint, I guess right now you guys have, as part of the new generation USB modem is concerned for the channels, retail as well as enterprise?

That's right.

The company has remained stagnant with respect to, I guess, some of the other carriers, and given the performance or lack thereof of your competitors, I'm just wondering if you could shed some light in terms of the potential with respect to Verizon and Telstra? You've already alluded to the fact that the new modem that Sprint has taken, you have received orders from other carriers? Obviously, they're (inaudible) carriers?

That's correct. And as I indicated in the prepared remarks, we expect to launch the Compass 597 with additional carriers in Q3.

In North America as well as beyond?

I'd prefer not to comment beyond that, Dev. But it is more than one carrier and in more than one region.

Okay. And any kind of carrier updates with respect to Japan?

Again, no specific names for you, but I think we hit a very important -- for us a very important strategic milestone in winning a channel slot with a large Japanese carrier during Q1 for a future USB product. It's not one of our currently shipping USB products, and we expect to be launched in that channel by the end of the year.

Okay. And is that an enterprise slot, Jason?

We think it's a pretty strong channel slot, and I'll have to leave it at that.

By the way, in addition to that PC adaptor channel win -- which, again, is our first one -- we now have two of our laptop OEM customers who have launched platforms in Japan with our embedded HSPA modules.

Okay. And the second category was obviously with respect to CradlePoint and AirLink. If you can give us any idea with respect to both individually as to what expansion plans are, and CradlePoint's footprint is in the U.S. in the region and what plans the company has to expand there from an annualized approximately 30 million run rate to, I guess, a higher run rate within that region as well as beyond. And also if you can give a similar kind of update in regards to AirLink.

Well, with respect to CradlePoint, remember, we've announced the definitive agreement, we haven't yet closed the transaction. So hard to give a lot of clear visibility there since CradlePoint's not yet part of the company. That won't happen until the July timeframe.

But as we look at CradlePoint, there's a couple of key levers for us, and one is our global channel footprint with wireless operators. So as you indicated, CradlePoint's business so far has been focused on the U.S., but I think we've got the ability to take those products not only to other additional carriers in the U.S. than they've been working with today but also to operators around the world. And I think at a high level we've received some interest from a number of our operator channels in the CradlePoint product. So I'm optimistic that we'll be able to turn that on fairly quickly once CradlePoint becomes part of our business.

The other leverage point there is, of course, with our vertical OEM customers, and right now CradlePoint supplies docking solutions to providers of industrial handheld computers. One of their customers is Motorola Symbol, who also happens to be a customer of ours on the module side. So I think we've got some pretty good leverage points there. There are customers that CradlePoint's supporting that we don't currently sell modules to and, vice versa, there are customers that we sell modules to that CradlePoint does not yet sell cradles to. So I think there's some pretty good channel leverage there too.

With respect to AirLink, we're working it hard. I mean we -- geographical expansion -- also segment expansion -- are two key areas that we're looking at. We've now introduced our mobile and M2M products to the European markets. We did that as part of our attendance at Mobile World Congress. We've secured CE registration on a number of our products -- I think it's four products -- and we expect to commence initial low-volume shipments of those products into Europe late this quarter.

Okay. Just one last question if you don't mind.

Besides the AirLink products, you said that there are some new products being launched into Europe in late Q2 '08 onwards. Can you tell us how many new products are being launched in Europe, please?

I think you're probably referring to our PC adaptor products?

Yes. All kinds of products.

Well, I've already commented on AirLink and CradlePoint at a high level. We also expect that we'll be shipping two new products in Europe starting in Q3, specifically our AirCard 885 ExpressCard, as well as our Compass 885 USB product, and we believe we'll have additional products for Europe late in the year as well. So I think we're entering, actually, a pretty strong product cycle for us overall with the launch of the Compass 597 for EV-DO and the imminent launch of the Compass 885 for HSPA, and we've got additional product launches teed up behind those.

Okay. Thanks, Jason and Dave. All the best. I'll stand back in line.

Dev, thanks.

Thanks, Dev.

Your next question comes from Kevin Dede from Morgan Joseph.

Go ahead.

Good afternoon, guys, and let me add my congrats. Very nicely done job here, especially on the outlook.

Thank you.

Jason, I was wondering if you might be able to shed a little light on forecasts, especially given the strength that you've seen in the past two quarters. Maybe you could comment on -- specifically in March -- where your customers sort of surprised you and how you've organized the company to meet those surprises?

Well, we had a couple of surprises in the quarter, Kevin, and at kind of an abstract level there was one negative surprise and one positive surprise, and when we give guidance, we try to give good risk-based guidance and try to count on some things going our way and some things not going our way.

And in Q1 what happened on the negative side was we missed a product launch with a customer in Europe. We had expected to get that, and that, unfortunately, slipped to Q2. But on the positive side, we had better supply-chain performance on the component side, particularly in March, so that we could satisfy some of the demand we had. As you recall, when we gave Q1 guidance, we indicated that we were supply constrained, and better performance than expected on our component supply chain enabled us to meet some of that demand that would have otherwise gone unsatisfied.

Have you made any operational changes, say, over the past 12 to 18 months that has added some flexibility? I mean, given some of the order sizes that trickled through the industry --

Massive changes. I would characterize them as massive changes. We've put our capital to work in increasing factory capacity in a material way. We've tried to put our balance sheet to work in getting our sales in a stronger inventory position, but that hasn't worked out quite yet because demand has outstripped our ability to supply and to build an inventory position. But you saw the start of that here in Q1. We were able to build a little bit of inventory by the end of the quarter as the component-supply-chain situation loosened up a little bit. Those are two main changes.

And the other main change is a number of quality initiatives. Quality -- kind of cliche -- but quality doesn't cost, it earns you money, and so we've been investing significantly in quality programs to do things like improve yields and improve on-time delivery, reduce customer errors, and that kind of thing. And that has an underlying effect of basically increasing your capacity. So we've been focusing a lot of effort there as well.

Can you talk to pricing pressure and ASP's from a geographic perspective? Some of your competitors have noted that they perceive more severe pricing pressure in, say, Western Europe and Asia versus the U.S. vis-a-vis reflected in relative ASP's. I was wondering if you could speak to that and whether or not you're expecting to see the playing field sort of level out worldwide?

I think that comment is fair. We've seen the same over the last couple of years, actually. The pricing pressure seems to be a bit more intense in Europe than it is in the U.S., although it's intense in the U.S. as well. I don't want to say it's not. But I think we're able to add a bit more value -- because of our location, we're able to add a bit more value, play a bit more of a role in the distribution channel, play a bit more of a role with enterprise customers and retail channels, and that helps us to prop up the ASP a little bit better than we see in Western Europe, in particular.

And I might add that the HSPA products have a higher cost basis as well. So you've got two kind of challenging, moving pieces there, right. You've got ASP pressure, but you also have a higher cost basis on HSPA products too.

Okay. Have you seen an acceleration in pricing pressure, say, versus third quarter or fourth quarter?

No. No. I'd characterize the price pressure as stable.

Okay. Congrats on the Fujitsu Siemens and the NEC laptop wins. Can you talk a little bit to maybe the features that you're bringing to that market where people look at Sierra's product as being of greater value than a commodity Ericsson module or Gobi?

Well, first of all, I mean, I think the key thing is having the right product to do specifically what those customers want to do, and those particular customers required only HSPA, which enabled us to focus on making the best HSPA module at the best cost and delivering the best functionality that we could.

And secondly and most importantly, we continue to get a lot of those wins -- not as many as we'd like, by the way -- but we continue to get those wins because of our support capability, being able to hold the hands of very quality-conscious players, particularly Japanese OEM's, who have very high quality standards, and ensure that we not only deliver them quality product but help them through their integration process and certification process. And they've worked with us in the past, and we've developed a lot of confidence, they've developed a lot of confidence in us, and we've been able to deliver, and I think that was a key part in us getting some repeat wins.

Last question from me just has to do on the opportunity in the M2M market in Europe and specifically with regard to the auto-safety initiatives. Now, I understand that the auto OEM cycle there is long and you're expecting to ship immediately, but I just was wondering if you thought that AirLinks product had an opportunity in that market?

In the consumer auto market, I'd have to say limited. That's the domain of guys like Wavecom and Siemens, and that's a good market, but, I mean, you really need to do a lot of heavy lifting and a lot of investing to even hope for the right product and channel position there.

So our play right now in the auto market is -- particularly the consumer auto market -- is more reactive than proactive, I'd characterize it, Kevin. So though there are some automakers who have approached us and we've engaged because we have a good suite of high-speed 3G products and some specific environmentals that others don't address, but I honestly don't think that's the volume part of the market.

So for us we'll be opportunistic and chase those opportunities as appropriate. Right now we're not going to dive into the auto market and try to take a big stake because I think that would be a massive investment for us, and we're just not in a position to do that right now.

Very good. Thanks for taking my questions, gentlemen, and congrats again on an excellent job.

Thanks.

Your next question comes from Sera Kim from JMP Securities.

Go ahead.

And congratulations on the quarter.

I just want to follow up on a previous question -- you mentioned on the OpEx side leveraging partnerships where it makes sense. Now, is this in the form of promotions with carriers or just additional training at the retail front to increase visibility?

Well, I'm going to be careful not to give you a list of all the things we're doing, Sera, but it does have a lot to do with support of the channel and training and different programs that we're investing in in terms of promotion, both direct with the carriers and sometimes through non-carrier channels as well. It's fairly broad-based, and I'm going to have to leave my comments at that. But I will underscore by saying I think that's an important investment for us to make in terms of building brand and maintaining share.

Okay. Great. And just housekeeping -- can you provide the product mix numbers, by technology and distribution for GSM, CDMA and --

Sure. It's Dave, Sera.

So in Q1 GSM technology-based products were 67% of revenue, and CDMA was 32%, with other at 1%.

And do you guys still break out the carriers versus the OEM and resellers?

Yes. So, again, for Q1 carriers were 61%, resellers 20%, PC OEM's 14%, vertical OEM at 5%.

Okay. Great. Thank you.

You're welcome.

Your next question comes from Samuel Wilson from JMP Securities.

Go ahead.

Hi, can you hear me?

Yes. You're a little bit faint, Samuel.

Sorry about that. This is Doug Ireland for Sam Wilson.

I was wondering if you could tell your head count for last quarter?

Sure. We ended the quarter at 449, I believe, was the number. Yes, 449.

Great. And was there any currency effect for you?

In other income we had an FX gain of approximately $600,000.

Okay. And then a lot of the competitors in your space had terrible quarters and kind of blew up, and I was wondering if you could just give us your perspective on what's different between yourself and your competitors that makes your quarter look so good?

Better sales and earnings.

That'll do it.

You know, I don't know. It's hard to speak for our competition; right? I mean, our competitors are often dealing with a different set of customers, sometimes different markets. So there's lots of factors that may be affecting us that aren't affecting them and vice versa. So it's really tough to comment on them.

With respect to our focus, I mean, we are very focused on execution and, in particular, on new product development, new product launches, opening up new channels, and supporting the heck out of those channels. And that's what we're focused on. It seems to have been working for the past ten quarters or so, and that's what we're going to continue to focus on.

Great. Thank you.

Sure.

Your next question comes from Sean Peasgood from CIBC World Markets.

Please go ahead.

Good afternoon.

Hi, Sean.

Hi. My first question, I just wanted to go back to the next-generation USB products and the cost advantage that you were saying you were going to have with those products. Do you think that you're in a position now where you're in a better position than your competitors at this stage for ASP's and --

I'd have to say not in a material way, Sean. When we speak to a cost advantage, that's a cost advantage relative to our older-generation products, not necessarily a massive cost advantage to our direct competitors. We do focus a lot on the design phase, if you will, of not only creating the best possible performing products we can but also tight management of costs. But I have to say, at the end of the day, we're probably not producing products any cheaper than Novatel or Option; right? We're companies of similar size and scale.

So the big change for us was that with our older-generation products, we were basically paying for the R&D on those products as part of costs of goods sold, in addition to those products being manufactured by not our core supply chain and manufacturing facility. So that's changed now. With the new-generation products, those are all developed here internally and introduced to our mainstream supply chain and manufacturing environment, and that's what's driving a better cost basis for us in those products.

Okay. And then not to go back to the OpEx again, but I think you were saying in previous quarters that OpEx would be higher in the first half of '08 and then we would see that trend down as a percentage of revenue in the back half as R&D trickled off a bit, and it seems like there's a different message here today. I just wanted to clarify if we should be long-leading for that to be about as flat as where it is for revenue in the second half or if those comments kind of still stand from prior quarters?

I think, directionally, they still stand. I mean, we are --

There's leverage in the model, Sean, I think, and we still expect to benefit from that.

Okay. Great. And then, finally, just on Gobi, recently you have won a number of new embedded PC wins, and just wanted to know what you're hearing from your customers on Gobi and if there's been any change of heart there? I know that you've talked about competition and Gobi potentially taking away from revenue in the second half of '08, but is that becoming less of an issue now, and do you think you're going to be able to maintain revenues where they are?

We still think that's an issue, to be frank on it. So if you still expect in the second half that competition is going to become more real than it is right now with respect to launches by laptop OEM's who have embedded Gobi, as well as laptop OEM's who have embedded Ericsson modules too. So we do believe in the PC OEM part of our business, while there's going to be a pretty good tail on that business for us with existing customers based on the design wins we already have plus the new design wins we've secured, our outlook is still for that revenue to begin to trail off in the second half.

And you still continue to work with your customers on Gobi if they want to go that route?

Absolutely.

Great. Thank you.

Operator, we'll take one more question.

Your next question comes from Jeff Kvaal from Lehman Brothers.

Please go ahead.

Thanks very much, Jason and Dave. I was wondering if you could talk a little bit about the second quarter and if there are some one-time factors --

With respect to OpEx, Jeff?

It seems that his line got disconnected.

Okay. Well, we can catch up with him one on one.

Eric, I think that wraps the call up for us.

Okay.

So I want to thank everybody for joining the call.

Eric, if you can wrap the call up, please.

Sure.

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