司亞樂 (SWIR) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Sierra Wireless Inc. Third Quarter 2008 results Conference Call. At this time, all participants are in a listen only mode. Following the presentation we will conduct a question and answer session. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference is being recorded today, Tuesday, October 28, at 5:30 pm Eastern Time.

Please go ahead, sir.

Thank you, Luke. Good afternoon, everybody. Thanks for joining today's call. Joining me on the call today is Dave McLennan, the Company's CFO.

The agenda for today's call is Dave will read the forward-looking statements disclaimer, I'll provide a overview of the business update, Dave will cover our Q3 results as well as Q4 guidance, I'll provide some summary comments and then open the line for questions.

With that I'll turn it over to Dave to read the forward-looking statements disclaimer.

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 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 our 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 such forward-looking statement, which speaks only as of the date they are made.

These forward-looking statements appear in a number of different places, and could be identified by words such as may, estimates, projects, expects, intends, believes, plans, anticipates or other comparable words. Forward-looking statements include statements regarding the outlook of our future operations, plans and timing for the introduction and enhancement of our services and products, statements concerning strategies or developments, statements about future market conditions, supply conditions and customer demand conditions, channel inventory, 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 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, component supply limitations, the continuous committment of our customers and increased competition.

These risk factors and others are discussed in our Annual Information Form which may be found on SEDAR and in our other regulatory filings with the Securities and Exchange Commission in the United States and the Provincial Securities Commission in Canada.

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

And finally, 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 further forward-looking statements should the assumptions related to these plans, estimates, projections and beliefs change.

With that I'll turn the call back to you, Jason.

Thank you, Dave. During the third quarter of 2008, we achieved strong year-over-year revenue growth, solid profitability, and record cash flow from operations in the face of stiff economic headwinds. During the quarter we grew revenue by 23% on a year-over-year basis to $136.8 million.

Our earnings from operations were $9.8 million or 7.2% of revenue. Cash flow from operations was a record $22.8 million.

While our year-over-year revenue growth and cash performance was strong, our results fell short of our expectations as a result of missing an expected product launch with a key wireless operator. Notwithstanding our disappointed about the missed launch, we are encouraged by the strong revenue performance from recently launched USB products and other channels, as well as the achievement of several important product launches and strategic milestones during the quarter.

Our new Compass USB products gained strong market traction overall and were launched with several wireless operators across the US, Canada, Europe, and Asia.

We also commenced a strategically important development collaboration with Telstra, Qualcomm and Ericsson, to bring to market the world's first HSPA plus network service and device, representing a solution that will triple the data rates experienced by today's mobile broadband users. We believe that this collaboration once again underscores the strength of our position as a recognized innovation leader in wireless technologies.

During the quarter, we also invested approximately $5 million in repurchasing and canceling 408,000 shares of Sierra Wireless stock under the previously established normal course issuer bid.

Moving to specific updates on our product lines, I'll start with our PC adapter business. PC adapter revenue was $98 million in Q3, down 6% from Q2 and up 35% compared to Q3 of 2007. Sales of USB modems contributed 71% of our PC adapter revenue, compared to 73% in Q2.

Our new breakthrough Compass USB modems enjoyed strong market introduction activity during quarter and have set the new industry standard for size, industrial design, functionality and performance. Our new Compass 885 USB modem for HSPA was a key contributor in the quarter and has now been successfully launched by several operators around the world including AT&T in the US, O2 in the UK, SwissComm and Sunrise in Switzerland, and Telstra in Australia.

Our new Compass 597 USB modem for EVDO, the world's smallest mobile broadband modem, was initially launched by Sprint in Q2 and then by TELUS in Canada and Telecom New Zealand in Q3. We had also expected to launch the Compass 597 with another major operator in Q3 but were unsuccessful in doing so. Fortunately, we have missed the launch window for the 597 with this particular operator and do not expect to launch the product with them.

Finally, our AirCard PC card products also continued to have strong traction with enterprise users around the world and contributed a solid 29% of our PC adapter revenue. In fact, year-over-year, AirCard PC card revenue was up.

Moving to specific Business Development highlights in our embedded modules business, in Q3, revenue from the sales of our embedded modules was $29.8 million, down 27% from Q2 and up 8 % compared to Q3 of 2007. Revenue from PC OEM customers represented about 50% of our total embedded module sales during the quarter and was down 40% from Q2.

Sales of our embedded modules to vertical OEM customers was about $15 million, down 7% from the Q2 high watermark and up 27% compared to Q3 of 2007.

As discussed on previous calls, competition in the PC OEM space is continuing to intensify, and as expected, we experienced significant revenue erosion in this category in Q3. Notwithstanding the tough PC OEM competitive landscape, Microboard, a leading supplier of notebook computers in Brazil, selected our embedded modules to provide 3G wireless connectivity with the Microboard Elite notebook computer. Microboard Elite is now available for sale in Claro, carrier owned retail stores in Brazil.

During the third quarter, NetComm launched two wireless gateway devices that use our HSPA embedded modules on Telstra's Next G network. These wireless gateways support a variety of business and consumer applications, including home internet access for Telstra's Big Pond subsidiary.

We've now established a very strong market position with manufacturers of networking equipment. With the addition of NetComm, our uniquely positioned 3G embedded modules are now designed into a broad range of networking equipment from leading manufacturers such as Cisco, Ericsson, Digi, One Access of France, LandComm of Germany and others yet to be announced.

We also continued to build on our focus in the energy sector securing a design win with Cal Lab for their new wireless meter reading communication platform.

On the product side, we introduced the MC8792V for HSPA networks, our first embedded module to offer UMTS 900 megahertz frequency band support and a feature rich, cost effective product. Expect to begin commercial shipments of this product late in the year.

With the past 10 plus years, we have 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 M2M. We believe that the avenues for growth are many. We are investing to expand our position.

Moving to mobile and M2M gateways, mobile and M2M gateway sales were 7.2 million in Q3, down approximately 13% compared to Q2, and 26% from Q3 of 2007 as a result of macroeconomic headwinds. During the quarter, a broad range of our fixed and mobile intelligent gateway devices were certified an operator networks including Verizon Wireless, BellMobility, Alltel, Rogers Wireless and TELUS. We also commenced shipments of our Pinpoint products to customers in the EMEA region.

Our ALEOS embedded intelligent software has been enhanced and now includes events reporting capabilities for our AirLink Pinpoint mobile gateways. ALEOS events reporting engine provides Pinpoint customers with realtime event status that is highly customizable and can be remotely managed, controlled and configured.

During the quarter we also completed an agreement to purchase the assets of Junction, an innovative supplier of routers and device management solutions for machine to machine applications. Transaction has closed, and Junction products and technology are being integrated into our mobile and M2M product plans. We expect the Junction assets to accelerate our time to market on key road map items to bolster our position in the M2M space.

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

Overall, we view our Q3 results as solid in the face of challenging macroeconomic times. During Q3, we launched new breakthrough products with operators all around the world, secured new embedded module design wins in key segments, bolted our position in mobile and M2M with new product enhancements and an opportunistic asset purchase, demonstrated our innovation leadership by securing a strategic development collaboration with industry leaders in a new, emerging technology, and we also invested significantly in our own stock.

We continue to be encouraged by the longer term growth opportunities in our market. Mobile broadband services continue to expand and advance around the world. Customer awareness of these compelling services is growing. Market segments and applications are expanding, and overall market penetration is still very low.

With those comments I'll turn it over to Dave to review Q3 results and Q4 guidance.

Thanks, Jason. Our results are reported in US dollars and are in accordance with US GAAP. The third quarter of 2008 our revenues were $136.8 million. Gross margin was $37.8 million or 27.6% of revenue, and our net earnings were $7.3 million or $0.23 per diluted share.

Our results include 1.6 million of stock based compensation expense, which $100,000 is in cost of sales and $1.5 million is in operating expenses. Also included is $700,000 of purchase price amortization associated with the acquisitions of AirLink in May 2007 and AirPrime in 2003. On a pro forma basis excluding these items, net earnings were $8.9 million or $0.28 per diluted share.

Our cash, short and long term investments totaled $227 million at the end of Q3, which includes the generation of a record cash from operations of $22.8 million.

Relative to the guidance we provided for the third quarter of 2008, revenue of $136.8 million was 2.3% lower than our guidance of $140 million. Relative to our expectations for the quarter, performance was largely as expected in each of the product categories with the exception of USBs, which came up short as a result of missing an expected launch of the Compass 597 with a major operator.

Gross margin during the quarter remained stable at 27.6%. Earnings from operations of $9.8 million was lower than our guidance of $11 million and net earnings of $7.3 million or $0.23 per diluted share was lower than our guidance of $8.5 million or $0.27 per share.

Comparing Q3 results sequentially to Q2, revenue decreased by 12% to 136.8, down from 155.7 in Q2 '08. This decrease was driven primarily by a decrease in sales of embedded modules to PC OEM customers and slightly lower sales of USB modems.

Total USB sales were $70 million or 51% of our Q3 '08 revenue, compared to $76 million or 49% of our Q2 revenue. Total OEM revenue was $29.8 million in Q3 compared to 40.7 in Q2, reflecting an unexpected $10 million reduction in revenue from PC OEM customers as a result of Gobi and Ericsson entering the market. And a $1 million decrease in vertical OEM from record levels the previous quarter.

Our M2M revenue declined $1 million sequentially in the quarter as well.

During the quarter, AT&T and Sprint each accounted for more than 10% of our revenue. In aggregate these two customers represented approximately 53% of our revenue. In Q2, AT&T and Sprint collectively represented 48% of our revenue.

Comparing Q3 results sequentially to Q2 on gross margin, gross margin of 27.6% was consistent with Q2 of 27.8%. Our operating expenses decreased to $27.9 million from $28.8 million in Q2. These numbers are not directly comparable as Q2 contains some specific expenses which were not incurred in Q3.

Normalized Q2 expenses exclude $700,000 of CradlePoint termination costs and the final $1.5 million repayment expense on our first TPC program, both of which were not expense items in Q3. Normalizing Q2 for these expenses results in Q2 OpEx of $26.6 million, therefore a Q3 OpEx of $27.9 million increased by approximately $1.3 million over the comparable Q2 normalized. This increase was driven by increased new product launch activity in Sales and Marketing, as well as increased R&D costs related to new product development.

Earnings from operations decreased in Q3 to $9.8 million compared to $14.4 million in Q2, resulting in an operating margin of 7.2 compared to 9.3% in Q2. Other income comprised of interest income and FX gains or losses declined by $750,000 primarily due to an FX loss of $800,000 in Q3.

Net earnings decreased to $7.3 million or $0.23 per share from $11 million or $0.35 per share in Q2. Average shares outstanding on a fully diluted basis decreased to 31.3 million as a result of the purchase and cancellation of 408,000 shares under our buyback program.

Looking at the Balance Sheet, I spoke earlier about cash. Accounts receivable decreased to $88.7 million at the end of September from $98.4 million at the end of June, simply reflecting lower sales in the quarter.

Inventory increased to 33 million at the end of September from 26.9 million at the end of June, mainly as a result of an increase in HSPA and EVDO Rev A components.

Looking at revenue by product line, revenue from PC adapters was down 6% versus Q2 to $98 million representing 72% of our business. On a year-over-year basis, PC adapter revenue was up 35%.

OEM revenue was down 27% versus Q2, 29.8 million representing 22% of revenues in Q3, and on a year-over-year basis, OEM revenue was up 8%. Within the OEM product line, sales to PC OEMs were approximately $15 million in Q3, down $10 million as expected from Q2, while sales to vertical OEM customers generated revenue of $14.8 million down $1.2 million from Q2.

Finally, mobile and M2M revenue was down 13% versus Q2 to $7.2 million, representing 5% of our sales, and on a year-over-year basis mobile and M2M revenue was down 26%.

Looking at revenue by geography, Q3 compared to Q2, revenue in the Americas decreased by 7% to $97.1 million representing 71% of our revenues. This decrease was due primarily to lower sales of USB modems, M2M and embedded module products. Compared to Q3 of the prior year, sales in the Americas increased 21%.

In Q3, revenue in Europe decreased 18% versus Q3 to $12 million representing 9% of our revenue in Q3. This decline was due primarily to decreased sales of our embedded modules to PC OEM customers and lower PC card sales. Compared to Q3 of the prior year, our European sales were up 31%.

And finally revenue in Asia Pacific decreased by 25% versus Q2 to $27.7 million representing 20% of our business. The decline here is primarily due to sales of embedded modules, lower sales of embedded modules to PC OEM customers as expected. Compared to Q3 of the prior year, our Asia-Pac revenue grew by 25%.

Moving on to guidance, we're providing guidance for the Fourth Quarter ending December 31, 2008. Our guidance for the Fourth Quarter reflects expected erosion in sales of our embedded modules to PC OEM customers, combined with continued macroeconomic headwinds in our key markets, as well as some contribution, new product launches expected in the quarter. Inherent in this guidance are risk factors that are described in detail in our regulatory filings and our actual results could differ materially from the guidance presented.

On a GAAP basis, guidance for Q4 '08 is as follows. Revenue of $140 million, earnings from ops of $10 million, net earnings of $7.3 million resulting in $0.23 per diluted share. Excluding stock based compensation and acquisition amortization, pro forma earnings from operations will be $12.2 million and pro forma net earnings will be $8.9 million resulting in pro forma earnings per share of $0.28 per share.

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

Thanks, Dave. Some quick summary comments. Overall we view our Q3 2008 results as solid in the face of challenging macroeconomic times. Q3, we launched new breakthrough products with operators all over the world.

We secured new, embedded module design wins in key segments such as networking equipment, bolstered our position in mobile and M2M with new product enhancements, carrier approvals and opportunistic asset purchase. Demonstrated our innovation leadership by securing a strategic development collaboration with industry leaders in an emerging technology, and we invested significantly in our own stock.

Looking ahead, our short-term view is cautious given the expected erosion in sales of our embedded modules to PC OEMs combined with stiff macroeconomic headwinds. Continue to be encouraged by the longer term growth opportunities in our market, mobile broadband services continue to expand and advance around the world.

Customer awareness of these compelling services is growing, market segments and applications are expanding, and overall market penetration is still very low.

Based on this outlook, and our confidence in our ability to execute, we are continuing to invest in further strengthening and broadening our market position.

With that, Luke, we will open the line up for questions.

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. (OPERATOR INSTRUCTIONS). Your first question today comes from Mike Abramsky of RBC Capital Markets. Please go ahead.

Yes, thank you very much. Could you help us understand how your uncertain macro-economics or economy comments reconcile against some of the recent strong record mobile data sales at AT&T and Verizon?

So, I'll take that, Mike. With AT&T, we enjoyed a very strong quarter. And with Verizon, we have limited exposure. So that's a key thing for you to understand.

With respect to the trajectory of our business, we probably felt some seasonality I would say in Q3, coming off a pretty big volume Q2. Q2 ASPs were down a bit but we had higher volume. So a combination of a bit of seasonality, lower exposure to Verizon, and stiff economic headwinds in some of our other channels resulted in sales of PC adapters being slightly down. And our mobile and M2M business, that business has more direct exposure to enterprise spending, which I think everybody will agree is a bit challenged right now, been feeling the effect of economic headwinds in that business for the past couple of quarters. And we saw it again in Q3, again probably combined with some level of seasonality.

Okay, well are you seeing carriers reduce channel inventory heading into the holiday season given the consumer uncertainty?

No. I think, as we look at the way carriers are behaving, certainly they are continuing to look at mobile broadband as a key category to drive heading into the holiday season, and have the promotional machines pretty strongly geared up. And I believe with the expectation of higher sales in Q4. However, they are also being careful on inventory levels. So we see a careful balance there of continuing to promote the products hard with the expectation of selling more, with also managing their inventory in a smart way, and I don't think trying to over correct but certainly managing inventory in a smart way.

Could you give us just a little color on the missed launch and the window of the miss, and what kind of happened there and what control you may have to avoid similar issues going forward?

Yes. So, clearly a disappointing miss for us and just to be very clear on it, the miss was as a result of our own misexecution. And we had been trying to launch the Compass 597 with this particular operator for a while, and we're confounded by one particular certification requirement.

And candidly, by the time we lasered in on how to correct the issue and attain and meet that certification requirement, we timed out. And we missed the launch window as a result of our mis-execution. And in our business, as we've proven to the positive several times over, when you hit launch windows right on, you get excellent benefit and momentum in that channel. And when you miss them, you pay the penalty and that's exactly what happened in this case.

So was this a competitive loss, like did someone else hit the window?

No, I thought I was clear on that. We mis-executed. We missed our launch window. This particular operator was already selling other products, it may not be as appealing as our Compass 597, and there was clearly a lot of interest in our 597 but we missed the window. And it wasn't, it didn't put them out of business with us missing the window.

Okay, and just lastly, just on the OEM side, what is the trend in your view going forward on attrition? How, OEM I guess is 11% of your total and down 6% on a year-over-year basis if I'm correct, so what is the risk of that deteriorating further and how far might it go down?

I think you must be referring specifically to PCO.

Correct, sorry, PCO.

OEM is up overall is up on a year-over-year basis.

Yes, correct sorry. PC OEM.

Yes, so PC OEM, we continue to have kind of a core group of what I would term as Tier 2 PC OEMs, guys like strong players in Europe like Fujitsu Siemens, NEC in Japan, Microboard now in Brazil. So we've got a nice core there, however we do see our business from some of the Tier 1 guys like HP and Lonovo continuing to erode as they launch new platforms with competing modules inside.

Did have some revenue, although lower revenue from HP and Lonovo in Q3. We expect that to go lower in Q4 and that's embedded in our guidance. So as we look at, without giving specific guidance on the category, we are we believe OEM overall in Q4 will be down, of course implies PC adapters will be up. And our bias is, most of the reduction in our OEM business will come from PC OEMs with a bias for vertical OEMs being flat to up in the quarter.

That's helpful. Thank you very much.

Okay.

Your next question comes from George Iwanyc of Oppenheimer & Company. Please go ahead.

Thank you for taking my questions, Jason and Dave.

Yes.

Jason, following up on your comments on the carrier activity and the strong promotional support you still see there, what type of visibility do you have into the order patterns there, and with the inventory levels being thin, how quickly could you respond to shift in demand?

I think generally speaking, on promotional activity and overflow, first of all promotional activity I think is quite visible, players like AT&T in particular are spending pretty heavily in television advertising and other promotional activities.

We see a lot of activity, broad based activity, across all of the major operators in not only carrier owned retail but also now big box retail, including players like Best Buy, weekend circulars and the like. So we see that promotional activity at a high.

In terms of order book, order book gives us good visibility to Q4, probably better visibility than we had at the start of Q3. Our bookings in Q3 were strong, stronger than they were in Q2 or Q1, so Q3 was our strongest bookings quarter to date. So that gives us, both with a combination of promotional activity and our strong bookings activity, that gives us probably improved confidence if you will, in our visibility in Q4.

And then with respect to responding to potential spikes in demand, we've put part of our balance sheet, notwithstanding our strong cash performance, we put part of our balance sleet to work in trying to build a stronger inventory position so that we can address spikes in demand. So that's how our business model is put together.

Obviously when you launch brand new products, sometimes that's tough to do out of the blocks because you're often catching up to demand. But our business model has us at a strong inventory position, so we can respond to positive changes in demand. So I think over the course of Q4, we should be in a pretty good position to respond to such changes.

How many new carrier launches are you expecting during the quarter, and is it primarily the 885 that you're expecting to launch?

During Q4? Yes. We are expecting more than we have announced and, but safe to say in terms of the big volume guys, they're out now, right? AT&T, our new product launch is with AT&T and Sprint are out and have good momentum, good sell-through momentum, and good promotional activity behind them.

A number of 885 launches with European operators and key Asian operators like Telstra. As you know, Telstra has been a key contributor to our business for several quarters now.

Beyond that we are expecting more launches. Certainly not of the size of AT&T or Sprint or Telstra, but we are expecting more launches, and we're targeting to have our first launch of an HSPA product in Japan by the end of the year as well.

And two more questions. Can you give us an update on how you're looking at your cash position and what, would you become more aggressive with your share buyback and change what you were hoping to do with that? And how, would you look at M&A in this type of environment or is that kind of put on hold for the time being?

Yes, I actually think it's an interesting environment for M&A. Notwithstanding public valuations making it tough, a lot of companies don't want to sell at these prices, but having a strong balance sheet and particularly relative to peers in our space, I think puts us in a very interesting position with respect to M&A. And we definitely are continuing to pursue M&A opportunities, and there continues to be a broad range of opportunities in the funnel, so we're definitely focused there, George.

Having said that, I think we demonstrated in Q3 a willingness to take a more balanced capital allocation approach, and put some of that balance sheet to work in buying back shares and taking anti-dilutive actions.

So we're keeping both of those options wide open as we head into Q4, and pleased that we have a combination of frankly, a timely new equity issue last year giving us strong balance and cash, and also strong cash performance adding to that. So I really think that puts us in a favorable position to consider both of those alternatives.

Last question for Dave. Can you give us what's the split of stock option expense was in OpEx, by R&D and Sales and Marketing?

Sure, George. So for Q3, $100,000 in cost of goods sold, $400,000 in Sales and Marketing, $300,000 in R&D and $800,000 in administration, totaling to $1.6 million.

Thank you.

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

Hi, Jason and Dave.

Hi, Dev, how are you?

Good. Quick question, Jason, in terms of I guess the inventory levels, I know that most Operators for new product launches that you guys are anticipating in Q4, but the missed launch, is that anything in terms of inventory or is there going to be use for some other purpose?

Good question, Dev. So clearly, we're anticipating a launch there and that doesn't just drive R&D activity and Sales and Marketing activity. Of course that drives Supply Chain, so we were prepared on the Supply Chain side to fulfill that demand. That demand is not going to come to pass.

However, we have high confidence that we have other customers to take the inventory of that EVDO Rev A product. So probably causes us to do some double time here but we think we've got that lined up, we've got the customers lined up and we don't think we are unduly exposed to the inventory as a result of missing the launch.

Okay, a sidebar question on the same kind of thought, so the big carrier that probably could not take up your product, although you found it attractive compared to the population, I'm sure the carriers are also suffering by the virtue of that. So is it going to build on your visibility into the carrier and your relationship, do you think it's going to stay, or are you going to develop something else for them?

Well, I think everybody knows who this particular carrier is, and we continue to focus time and effort on them on the business development side, and are prepared to put our R&D machine to work as well addressing their needs. But having said that, this particular product launch was important to us, and so definitely it took some wind out of our sails with respect to momentum at that particular account. So we have to reload there and go back and try to hook them on some of the new products in the road map and hopefully we have another shot at a big launch there soon.

Okay, Jason, in terms of the 900 megahertz product, that has been launched on the HSPA, what's your potential to just wrap your arms around in terms of revenue profile, what regions and what time frame do we expect it?

Well, we've got a pretty broad and diverse line up of embedded modules. This is our first one supporting 900 megahertz and probably nobody will be shocked to learn that that's key for the European market in particular. And we have key European OEM customers looking for that capability, so it's an important product launch for us. We do expect to get business, principally out of Europe on that product.

I wouldn't say it's going to be extraordinarily material but it's important nonetheless. And the other important aspect there to recognize is that we have a lot of R&D leverage, right? So it just so happens that our first product launch that supports 900 megahertz for UMTS is a module, and as you should expect we're going to leverage that development to make sure we have 900 megahertz capable PC adapter products, principally again for the European market as well in the near future.

Okay and one last question Jason from my side. Based on your guidance, the $140 million and $0.23, kind of doing some calculations backward and assuming OpEx will be constant, the way we have seen in Q3, it kind of leads me to believe that your either anticipating a margin pressure going down from 27.7 to close to about 27.2, or the OpEx is going up to support your new product initiative. Which one of the two is it, and am I completely out of the ballpark in terms of making these statements?

No, you're right on, and it's more the latter, so we are inclined to view, we're not giving specific guidance. We're inclined to view gross margin as stable, continuing to be stable, and our inclination is to say that the OpEx line is the one that changes.

Okay. Thanks. I'll jump back in line. Thanks, Jason and Dave, for taking my questions.

Thanks, Dev.

Your next question comes from Mike Walkley of Piper Jaffray.

Great. Thanks. Jason, just a follow-up question for you, you made some interesting comments about the competitive, in terms of your stronger balance sheet. Could you just build a little bit on that and talk about your outlook for next year in terms of your competitors and where you see certain competitors strong or where you see the best areas for Sierra Wireless growth next year?

Gosh, that's a tough question, Mike. With respect to our competitors, I'm not really comfortable commenting specifically on their position. I'm reflecting again on us. I'm happy we're in the strong balance sheet position, and that's not intended to give you a gloomy outlook for our business next year but it is intended to highlight the fact that we've got, that gives us flexibility.

It gives us flexibility on the M&A side. It gives us flexibility on the share buyback side. It gives us flexibility to weather tough macroeconomic times. That was really the point of my comment.

And in particular, with respect to M&A, while valuations are low and it's tough for any company to sell at these values, clearly there are some concerns and sometimes impatient investors out there as well. And sometimes cash driven deals at a reasonable premium can be viewed as very attractive, so again, I just think it gives us more flexibility on a lot of dimensions.

Okay, thanks, and theoretically, could you see, if you consolidated some of the industry, some scale advantages you could get in terms of margins longer term? Is that part of your thinking in that area?

It's always a consideration for the M&A funnel, Mike, but I will, just shooting straight on that issue, I think it's safe to say that if you look at our M&A funnel, it's less about consolidation and it's more about diversification.

Okay. That makes sense. That's consistent with your prior comments.

And just to go back to this one customer, one last time that you had the product slip on, when you look at kind of product cycles with this customer, is it something, a Next Generation product you'd expect maybe a couple quarters out when you have a chance to get back in with this customer or is it a shorter time frame based on their next order patterns?

I think again, it's tough to have a crystal ball in this, right? But my inclination is to say that it's later rather than earlier.

Okay, great. That's helpful. Thanks very much.

You bet.

Your next question comes from Amir Rozwadowski of Barclay's Capital. Please go ahead.

Thank you very much for taking the question. Jason, in terms of your outlook, I know you don't like too much talking about the competitive position, but in terms of, if we look at your guidance for Q4, are you assuming a stable competitive environment for you with regards to your positioning at your key carriers?

Yes, I think that's fair to say, Amir. We think Q3 was another stable share quarter, again we were hoping for gain, right? That didn't happen unfortunately, so it's our view is it was stable in Q3, and looking to Q4, that's our feeling again as well, kind of stable on the share scene.

And then also, in terms of the pricing environment, what are the puts and takes there? Should we consider increased pressure in a back drop of macroeconomic uncertainty, or do you think pricing sort of folds up at this point?

Our current position is normal price erosion, right? And that's been roughly, if you see through the kind of the Q1 to Q2 adjustment, because we were getting rid of some legacy products at higher ASPs particularly in USB lans, and moving to new platforms at lower ASPs, so if you look through that kind of one quarter adjustment our view is ASPs should continue to erode at a normalized pace, which for us is about, right now it's on a 10% per annum pace, and we feel fine with that. Our view is, with ASP reductions like that, we can keep up and maybe even get a little ahead of that on our cost reductions.

So right now, we're not planning on increased ASP pressure as a result of the macroeconomic situation. Now, I will say we've got the pedal to the metal on R&D cost reduction, and that's kind of a new thing for us. It's been new over the past, I'd say maybe two quarters, and with respect to some of our new product launches that you'll see right at the end of this year and the first part of 2009, the capability of those products won't be dramatically different but the cost basis will be. So they're actually new Product Developments with the principal new feature being reduced cost. So we're investing more R&D than we have historically in cost reduction.

Okay. So air interface wise we may not see a difference but more so in Next Generation product at a lower cost?

Yes, that's right. Other than of course the HSPA plus collaboration I referred to earlier.

Okay, okay, and then last question if I may, on the PC OEM side, and there have been suggestions of potential new RFPs for design in 2009, I was wondering, given how Gobi and Ericsson have executed in the marketplace, do you still see potential opportunities there?

We do. We do. Although we are taking a realistic view of that, Amir, so we're not giving up on the space by any stretch. However, Gobi and Ericsson have experienced some success here. Their pricing is very low.

The Gobi platform of course has a hard wired cost advantage over what guys like us can accomplish. And the Ericsson solution is being sold at or below cost, so that's a tough environment. However, we're not giving up on it and we continue to stay close to our existing OEM customers as well as guys who have now embedded the Gobi and Ericsson solutions. And I would say we're more hopeful than expectant that we'll have a reversal in that space.

Great. Thank you very much for taking the question.

Sure.

Your next question comes from Matthew Hoffman of Cowen. Please go ahead.

Yes, hi, another question on the competitive environment. Hoping for a little color specifically on Huawei, that business has reportedly been for sale but they seem to be unable to get it done. Is that proposed sale having any impact at all on Huawei's ability to gain market share, in fact are you seeing signs they're losing some steam here in the second half maybe as a result of being up for sale, thanks.

No. I think what you're probably asking was their effort to sell part of that business a distraction and has that taken some momentum out of their market execution.

My view of Huawei is constant, if you will. They've been executing well. I don't think they've necessarily gained a tremendous amount of share in the last couple of quarters, nor have they apparently given up much share in the past couple of quarters.

So I would view them right now as at a stable level. We haven't seen them have any meaningful traction in the North American markets. They continue to have a strong position in Europe, and again my assessment is they haven't gained or lost a material amount of share in the European market where they are particularly strong.

So I think with respect to their business performance, the attempt at selling part of the business has been kind of a non-event.

Did they reach any sort of theoretical market share limit in some of those European and Asian operators, and that's allowed maybe some of the other data card providers here to gain some market share or hold it at better pricing?

Well, like I said, my comment is I think share is stable but again, in their strongest market we don't have as much exposure. So I will say that I think carriers would be hesitant, even carriers who push a brutal pricing strategy, I think they will be hesitant to have any of the very focused players, whose entire business is mobile broadband, go away.

So I think they will be careful there, and while there's a lot of focus particularly in Europe and in some markets in Asia, a lot of focus on price being paramount, I think that operators will be careful not to unduly hurt the innovators. Because it's innovators like us, like Option of course in Europe, that are driving a lot of the first to market activities, and case in point, look at our collaboration with Telstra.

They've selected us, not one of the big US or European OEMs or one of the big Asian price leaders like Huawei. They've chosen us to get them to market first with leading edge HSPA Plus product. So I think carriers will be very careful not to give up that kind of capability because it's really important. When operators want to launch a new service and drive a competitive differentiation for their own services, they need innovators to help them do that.

Great. Good luck out there.

Sure, thanks.

Your next question comes from Sera Kim of GMP Securities. Please go ahead.

Hi, good evening. Just wondering, one last question on the wireless on Verizon. When you mentioned it will be later than sooner, I'm just wondering, when you come up with a new feature, you mentioned new product road maps so new features and then new AirLink will probably come later. Do you think you can get into that account with the new features even though it's still in the same AirLink?

Well, Sera, I think I answered that question, right? Yes, I think we might be able to, but my view is, and we didn't name Verizon, my view is in the large operator that we were expecting to launch with, we have products in our road map that they may find interesting. They may be different features, they may be different form factors, I'm not going to give that much visibility on our road map, and hopefully that will give us an opportunity to penetrate that channel in a significant way.

By the way, we continue to have exposure to this particular channel on enterprise oriented products such as our AirCard 595. With respect to big volume categories though, we don't have good exposure and we're certainly working the road map, and to the extent it makes sense we'll be working the R&D machine to meet their needs and get a launch spot.

And will that certification issue resurface again or do you think that you've resolved that with a newer product that comes out--?

Well, the certification issue was with a specific product, right? And with the Compass 597, so we're disappointed in ourselves for having mis-executed on the Compass 597 with respect to certification, so clearly any new products, we would attempt to avoid such certification issues.

And I think if you look at our historical performance with respect to certification, we've done extraordinarily well. This particular time, we missed our own expectations, our own high expectations and that of the customer, so we need to take a look at our processes and our designs and make sure it doesn't happen again.

Okay, and you mentioned on the M2M side, economic headwinds. Just on the vertical OEM side, are you facing similar economic headwinds or is there some level of visibility, just given the different vertical markets that you guys are exposed to?

Yes, it's a good question. It's a very different kind of business, of course. However I will say a number of our vertical OEM customers do have exposure to enterprise spending and government spending, right? So clearly, down the Supply Chain or down the food chain, you would expect that economic headwinds are a risk there.

Going the other way, we have design win momentum, right? So it's a little tougher of a call candidly, because we're one step removed from the actual enterprise or government buying decision.

So on the one hand, I think it's intuitive that economic headwinds would affect the sales of our OEM customers that are embedding our technology. Going the other way, we're getting more and more design wins and have more vectors for growth and vertical OEM, so it is kind of a tough situation to call. We're bias to the upside, but we're being careful there.

Okay. And just last question. Given the macroeconomic headwinds that you're seeing, do you have plans to cut back on FX at all if you see more signs of slowdown, or do you think that you need to keep spending at these levels?

Yes, I think, well we have no plans to cut our OpEx. In fact we have plans to spend more in Q4, and you might think that's a little bit crazy but we are carefully increasing our OpEx for strategic reasons. And I think it's safe to say, given the macroeconomic uncertainty, we're being more careful with our expense ramp. We have no plans at the present time to cut back on expenses.

And I think, as we've seen these situations play out in the past, this is a cycle, right? And we're in an awful economic period right now, and it will end and when it does end, we want to have a lot of bullets in the gun so that we are best positioned to take advantage of the research and market growth.

So we're going to be very careful not to drop the product pipeline, not to gut our Sales and Marketing activities because of that fear, so that when economic activity does return in a big way and in a stronger way, we'll be ready. We'll be ready with marketing resources, sales resources and a full product line up.

That's our view right now. That could change of course over time but that's our view right now.

Okay, great. Thanks a lot.

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

Your last question today comes from Chris Umiastowski of TD Newcrest. Please go ahead.

Hi, thanks very much. Glad I made it under the wire there.

I think Jason, first I want to say I'm really glad that you've consistently been very open with the market about what your expectations are, and in terms of talking about the economic uncertainty, that's appreciated. What I want to know is, with respect to, well first of all before I get into economic conditions, can you just give me the break down of what your top two customers were as a percent of revenue for the quarter?

Yes, we don't break it down specifically, Chris. So we've said that AT&T and Sprint were both 10% customers, and in the aggregate, they represented 53%.

Oh, okay so I think that's the same as last quarter.

It's a little bit higher.

It was 48% last quarter, Chris.

Okay, so I mean, I guess with that kind of concentration and given the economic environment, and in particular people are worried about Sprint, can you just talk about what your mind set is here.

I realize you're planning on spending more money carefully. Does that imply that, if things get really bad out there, are you willing to go into a loss position for a little while, while the market settles or would you pull back at that point?

I'm just not going to answer that question, Chris, because that's just too much of a crystal ball kind of question, so we are going to be careful. We are probably not going to be in earnings maximization mode because we know we are going to spend a bit here and sales growth isn't what it was last year, right?

Right.

However, year-over-year growth continues to be strong. Our products have momentum, we are growing in some new vectors such as vertical OEM, and we're going to be very careful not to cut the wind out of the sails of those new growth factors. Or for that matter, cut the wind out of the sails on some of our key momentum products like USB with key operators, like AT&T, Sprint, Telstra, O2, Telefonica and others, right? And by the way, new launches in new markets like our launch later this year in Japan, so we'll be really careful not to do that.

Okay.

So we're not making a default position to go into a loss position, but we are saying we're going to carefully invest in continuing to drive the business forward, and to build some of the strategic building blocks we want to build under the business.

Okay. Maybe just as a quick follow on to that one then, if by next year, are you hoping that your top two customers are not anywhere close to 53% of revenue, or are you looking to get very significant revenue diversification here, or do you think we'll still be looking at those two customers being just the massive chunk of revenue that they represent?

Yes, I think unfortunately, we've got a couple big customers who buy a lot of stuff from us, and we're not going to refuse their orders.

And we're going to continue to invest in those customers by the way. We look at those customers as businesses unto themselves, and that's the way we invest in them, that goes right up and down the organization from sales marketing right through R&D, so expect us to continue to do that.

Do we wish they represented less than 50% of our business because we were continuing to grow strongly with them as well as penetrating additional operators and geographies and markets? Absolutely. We would like to not see that business shrink but see that shrink as a percentage of our overall revenue because other areas of our business are growing that strongly.

Of course, okay.

So we're taking a balanced investment approach, and if you looked at our road map, which I'm not going to show it to you of course, but if you looked at it, you'll see investments driven by those two big customers who we love dearly and we'll continue to invest in. You'll also see significant investments in products that are intended to diversify our revenue mix.

All right, is Sprint starting to request its suppliers to do CDMA and WiMAX multi-mode devices?

Well I think it's clear that Sprint is committed to WiMAX, and I think it's also clear that WiMAX will not cover the same number of pops any time soon as their Rev A network does.

Right but are they perhaps looking to have a portfolio of products that's ready for WiMAX just like, often you guys had sold say EVDO Rev A cards even though Rev A hadn't been fully deployed because it was anticipated that in the near term that would happen and customers would want that forward capability.

So if you let me finish --

Sorry.

So I think that does imply a need for multi-mode devices, and Sprint's an important, I just got done saying Sprint is an important customer of ours and we're continuing to make investments in our key customers including R&D investments , right? So I think enough said on

Okay. I also wanted to ask you about your view on smart phone add on plans versus adapter cards. I know this isn't something I've ever really been a big believer in and I'm still not because I think the form factor is just not ideal, but I have started to notice that carriers are starting to price add on plans for tethered modems very attractively, like $15 on top of an existing smart phone plan. And it saves you the alternative spending say $60 having a USB modem with a separate plan.

Yes.

Just given the pricing difference, I'm wondering what your comments are in terms of, is this taking off in the market at all?

Right, so my comments are if you're buying a $15 add on plan and most operators around the world you are certainly not going to get the same amount of data that you get for a $60 plan. That's just simple carrier math, right?

So phone add on plans or using one's phone as the modem device has always been a question in our business. You've been following us for a long time and it was a question back in the CD/PD days. So our view is, there's always going to be part of the market for whom they will satisfice and take a less of a work horse oriented data plan and take a less elegant ergonomic solution like a phone and use that as their modem.

Some customers have always done that. Some customers will continue to do that, and we believe and I think that this is proven out in the market growth, there's going to be another significant segment of customers, a growing segment of customers who will not satisfice on form factor or power management or data plan or speed, and they will buy devices like ours.

Okay, I appreciate that because really the only thing I noticed that was different was the pricing, but --

I think you need to do a little bit more research on that pricing because I don't think you'll find in a broad based way that $15 data plans deliver the same kind of experience as a $60 mobile broadband plan.

I'm sure they're more restrictive. Okay, appreciate that, and just for Dave quickly, wanted to touch on your balance sheet, you have long term investments almost a buck a share there I think it was 25 million. Can you just tell me again what's in that category?

Yes, think of that as part of our cash investment policy, so we've got an investment policy that allows us to buy some securities that are greater than a year, and if they are greater than the year, --

Okay, so from an analysis of what your cash balance is, I should just consider that as cash?

Yes, that's right.

Okay, thank you, and lastly just on your interest income, I noticed it was a little bit lower than we were expecting, is there anything unusual in the interest income line just for modeling purposes?

We did incur an $800,000 FX loss on our financial balances, so you should, if you wanted to get to interest income you should add that back to the $522,000 that's there.

Okay, appreciate it. Thanks very much for all the answers guys, and best of luck.

Thanks a lot Chris, and with that, callers I'll thank everybody for joining the call and for your questions. And I believe we have some potential follow-up one on ones here as well, so thanks again and goodbye.

Ladies and gentlemen, this concludes the Conference Call for today. Thank you for your participation. You may now disconnect your lines.