司亞樂 (SWIR) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Sierra Wireless, Inc., first quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions provided. (Operator Instructions). I would like to remind everyone that this conference is being recorded today, Thursday, April 30, 2009, at 5:30 P.M. Eastern Time.

And I will now turn the conference over to Mr. Jason Cohenour, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Luke, and good afternoon, everyone. Thanks for joining today's call. With me today as usual is Dave McLennan, the Company's CFO.

By way of an agenda, I'll start with some introductions. Dave will read the forward-looking statements disclaimer. I'll provide a business update. Dave will then walk us through the Q1 financial performance, as well as the Q2 guidance. I'll provide some summary comments and then we'll open the line for questions.

With that, I'll pass it to Dave for the reading of our forward-looking statement disclaimer.

Thanks, Jason, and good afternoon, everybody. Certain statements on this conference call that are not based on historical facts constitute forward-looking statements or forward-looking information within the meaning of applicable securities laws. These forward-looking statements are not promises or guarantees of future performance, but are only predictions that relate to future events, conditions or circumstances, or our future results, performance, achievements, or developments.

They 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 such 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 stock market conditions, supply conditions and customer demand conditions, channel inventory and sell-through, revenue, gross margin, operating expenses, profits and forecasts of future costs and expenditures, as well as statements about the outcome of legal proceedings and other expectations, intentions and plans that are not historical fact.

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

These 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 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.

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 forward-looking statements, should these assumptions related to these plans, estimates, projections, beliefs and opinions change.

Thanks, Jason, over to you.

Thank you, Dave. In the first quarter of 2009, we posted better-than-expected financial results, launched new market-leading products and achieved a major strategic milestone in completing our acquisition of Wavecom.

Our first quarter standalone revenue of $100.4 million and non-GAAP earnings from operations of $4.8 million were significantly ahead of our guidance provided on February 10. Our non-GAAP cash flow from operations of 4.5 million was also significantly better than expected.

Bookings and reported channel sell-through were solid during Q1, leading us to believe that the stability has returned to our business and to the market.

Also, during the quarter, we continued to demonstrate our world-leading capability in developing products for new AirLink protocols by launching the world's first HSPA-Plus device well ahead of our competition.

In addition, we introduced and launched important new successor products with key customers, expanded our embedded module and M2M gateway product lines and secured embedded design wins with new and existing customers in different market segments.

We streamlined our standalone cost structure, executing on our previously announced staff reductions of 56 positions and lowering our annualized labor costs by approximately $5.5 million.

While executing on our standalone business, we also achieved a major strategic milestone in completing our acquisition of Wavecom and implementing a formal change of control. We've now acquired sufficient voting rights in Wavecom to implement the squeeze-out process which is currently underway. Wavecom contributed $11 million in revenue and a non-GAAP loss of 2.8 million to our consolidated Q1 results.

We believe that our combination with Wavecom creates a true global leader in wireless for mobile computing and M2M, with the industry's broadest product line and customer base, innovative solutions, a global sales and support network and unmatched R&D capability.

Moving to specific updates on our product lines, I'll start with our PC adapter business. Q1 PC adapter revenue was 76.1 million, down 25% from Q4 of 2008 and down 28% compared to Q1 of 2008. Sales of USB modems contributed 84% of our PC adapter revenue.

The sequential revenue decline in this segment was driven by a combination of factors, including lower ASPs associated with new products, tighter inventory management on the part of operator customers, the impact of the global economic slowdown, product transitions with Sprint and Telstra and a small share loss at AT&T. We believe our channel position with our top three customers, AT&T, Sprint and Telstra is very strong.

During the quarter, we launched the world's first HSPA-Plus mobile broadband device, our USB 306 with Telstra in Australia. USB 306 delivers maximum downlink speeds of 21 megabits per second, three times faster than competing products. TSL in Hong Kong also launched the 306 during the quarter, along with our Compass 889 product.

We also commenced commercial shipments of our new AirCard 501 Express Card for HSPA networks during the first quarter. This product was initially introduced in the fourth quarter of 2008.

We launched our new Compass 888 USB device with several operators in Europe, including [02] Ireland.

We launched a new successor product with Sprint during the quarter as well, the innovative USB 598 that features, among other things, our unique light-branding technique. It's launching in January. Sales of the 598 through the Sprint channel have been very strong.

We also commenced shipment of our new AirCard 402 2-in-1 mobile broadband card for EBDO. The AirCard 402's unique design enables it to be used either as a PCMCIA card or express card, allowing customers to use the AirCard 402 with a variety of devices, including laptops and net books. The AirCard 402 product was launched by Sprint in early Q2.

Moving to specific business development highlights in our Embedded Solutions business -- in Q1, revenue from our Embedded Wireless Solutions on a standalone basis was $14.7 million, down 32% from Q4 of '08 and down 48% compared to Q1 of '08. Standalone sales of our Embedded Modules to M2M OEM customers was 11.2 million, down 22% from Q4 of '08 and up 32% compared to Q1 of '08. The sequential decline in this category was driven mainly by the global economic slowdown and a product transition with one of our larger OEM customers.

As expected, revenue from PC OEM customers declined further to 3.5 million, as we continued to experience share erosion in this space.

On a positive note, we earned our first Gobi Design win during the quarter with an existing PC OEM customer. We expect to earn additional Gobi Design wins with PC OEMs by the end of the year.

Including the Wavecom contribution of 9.7 million during the quarter, consolidated sales of Embedded Wireless Solutions were 24.4 million.

In the first quarter, we announced that Magneti Marelli, a global tier one automotive supplier, selected our Embedded Modules for integration into its telematics products for auto manufacturers. This represents our first design win with a tier one automotive supplier and will dovetail nicely with Wavecom's well established position in the automotive space. We expect the Magneti Marelli solution to launch this quarter with a U.S. truck manufacturer.

Also during the quarter, we introduced our new Embedded Module for HSPA-Plus Networks, the MC 8700, that allows OEMs to take advantage of the fastest mobile broadband data speed available worldwide. We expect the MC 8700 to be the world's first HSPA-Plus Embedded Module available and we've already secured design wins for the product.

Our test labs in Richmond, B.C. and Carlsbad, California, became CTIA accredited as authorized test labs, allowing our OEM customers to undergo over-the-air network testing in our facilities, rather than having to send their solutions to an outside lab. For our OEM customers, this results in faster time to market and lower development costs.

Wavecom signed an agreement with Telenor Connection, a division of Telenor, and provider of M2M Services and Solutions. The agreement enables Telenor Connections to offer Wavecom-enabled wireless solutions with the unique Wavecom in-SIM feature. The Wavecom in-SIM feature will allow the Telenor Connection SIM component to be embedded directly into the Wavecom device, enabling the rapid deployment of high-volume, high-reliability solutions for telematics, smart meters and other applications.

We believe the long-term growth and profitability prospects and the Embedded M2M markets are strong and our acquisition of Wavecom, our position, channels, geographical footprint and product line for these markets has significantly improved. We intend to leverage our combined assets and capabilities to establish a clear global leadership position.

Moving to Mobile and M2M gateways, standalone Mobile and M2M gateway sales were 8.2 million in Q1, flat sequentially and up 22% from Q1 of 2008. We're pleased to see a second quarter in a row of strong year-over-year improvement in this line of business, which has resulted from a continued general recovery in the business, combined with product line, segment and geographical expansion.

Including the Wavecom contribution of 1 million during the quarter, consolidated sales of Mobile and M2M gateways were 9.1 million.

During the quarter, we introduced our new AirLink Helix line of integrated 3G wireless routers that provide business continuity and remote site connectivity with onboard intelligence, extensive routing features and comprehensive remote management capabilities. We also announced that our AirLink line of intelligent Mobile and M2M gateways are expected to be available in Australia in the second quarter of 2009.

As we continue our integration efforts with Wavecom, we're encouraged by the many synergy possibilities we see with our Mobile and M2M gateway business. Wavecom Embedded Solutions can help us lower cost of goods and to develop highly integrated gateway solutions. Our Mobile and M2M channels will provide an expanded path to market for the Wavecom FastTrack products. And combining our intelligent gateway products with the Anywhere M2M Portal and applications will enhance our ability to deliver end-to-end solutions for key customers and segments.

We continue to view the Mobile and M2M gateway market as highly fragmented from a segment, channel and competition standpoint and believe it's fertile ground for profitable growth. We plan to continue to invest in growing this business with new products, solutions, segments and geographical expansion.

Some notes on the acquisition of Wavecom -- on December 2, 2008, we announced an all-cash offer to purchase the common shares and OCEANE convertible bonds of Wavecom, a global leader in wireless M2M solutions based in France. The total value of the transaction was approximately EUR218 million, representing an implied enterprise value for Wavecom of approximately EUR85.5 or 0.66 times 2008 revenue.

There were two tender periods in France and the U.S., the second ending on March 31st. We acquired 95.4% of the voting rights in Wavecom. This amount was sufficient to implement the squeeze-out of remaining shareholders and to request a delisting of Wavecom shares, ADSs and OCEANEs from the Euronext and NASDAQ stock exchanges. Squeeze-out is now complete in France and Wavecom has been delisted from the Euronext Stock Exchange. We expect the squeeze-out process to be completed soon in the U.S. and for Wavecom to be delisted from the NASDAQ Stock Exchange as well.

On March 6, we effected a formal change of control, accepting the resignations of the Wavecom Board Directors and the CEO, Ron Black. Ron has accepted a temporary, non-operating assignment with the Company to assist in certain integration activities and will stay on with the Company through the end of June.

The Wavecom standalone expense restructuring, previously announced in Q3 of 2008, has progressed. In February, the Wavecom U.S. staff was reduced by approximately 40 positions. The Wavecom staff in Europe will be reduced by approximately 90 positions in the coming weeks. That number includes contractors. In total, the approximately 130 staff reductions, combined with other activities, will result in annualized savings of approximately $16 million.

We've established a formal integration structure, process and teams. We've been very busy with integration activities and believe that we're making good progress. We believe that there are many areas to capture revenue, cost of goods and op ex synergies, and that the combined Company will be well positioned to drive profitable growth. We expect to complete most of our integration activities by year end with some tasks extending into 2010. We expect the transaction to be accretive to earnings in Q1 of 2010 and we look forward to reporting to our stakeholders on our integration progress and synergy targets during our next earnings call.

With that, I'll pass it back to Dave to cover our results and guidance.

Thanks, Jason. Our results are reported in U.S. dollars and are in accordance with U.S. GAAP. For the first quarter of 2009, our consolidated revenue was 111.4 million. Gross margin was 30.7 million or 27.6% of revenue. Loss from operations was 10.3 million and we had a net loss of 23.7 million or a loss per share of $0.76.

We had a lot going on in the quarter related to the Wavecom transaction which we closed at the end of February. Therefore, our Q1 results include one month's contribution from Wavecom.

The guidance we provided for Q1 was on a non-GAAP basis, which excluded the impact of the Wavecom transaction, as well as restructuring costs, purchase price amortization and stock-based compensation.

So what I'd like to do next is walk through these adjustments to get to the non-GAAP numbers which will then be on a comparable basis to the guidance we provided you, as well as our previous quarter.

So GAAP revenue in the quarter was 111.4 million and that included revenue from Wavecom of 11 million, resulting in non-GAAP Sierra revenue of 100.4 million.

GAAP gross margin was 30.7 million or 27.6%. This includes Wavecom gross margin of 3.5 million and stock-comp expense of .1 million, resulting in non-GAAP Sierra gross margin of 27.3 million or 27.2%.

GAAP op ex was 41 million, including 6.6 million from Wavecom, transaction costs of 6.5 million, restructuring and integration costs of 1.4 million, stock comp expense of 1.9 million and purchase price amortization of 2.2 million. This results in non-GAAP Sierra op ex of 22.4 million and non-GAAP Sierra operating income of positive 4.8 million.

Moving to the FX loss on our income statement of 9.9 million, this includes an unrealized net FX loss as associated with Wavecom of 9.1 million, leaving non-GAAP Sierra FX losses of .8 million. You recall that in Q4, we had a very large unrealized FX gain of about 18.4 million associated with the Wavecom transaction.

The other line in our income statement of minus 4 million includes Wavecom-related financing costs of 4.3 million, partially offset by Wavecom net interest income of $100,000, leaving $200,000 of non-GAAP Sierra interest income.

Then moving down to net income, considering all of these adjustments, non-GAAP net income after tax and non-controlling interest, was 4.3 million or $0.14 per diluted share.

So comparing these non-GAAP results to the non-GAAP guidance we provided for the first quarter, revenue of 100.4 million was better than our guidance of 93 million. Non-GAAP earnings from operations of 4.8 million was better than our non-GAAP guidance for a loss of $0.5 million and non-GAAP net earnings of 4.3 million or $0.14 per diluted share was greater than our non-GAAP guidance of zero.

Our cash and short-term investments totaled 145.1 million at the end of Q1, of which 29.5 million remains as restricted cash associated with the Wavecom acquisition which then leaves an unrestricted balance of 115.6 million.

During the quarter, consolidated cash from operations was 10.5 million. Now, this is comprised of non-GAAP Sierra cash from operations of positive 4.5 million, non-GAAP Wavecom cash from operations of approximately minus 3.1 million, cash transaction and restructuring costs of 5.9 million and a tax refund recovery from Wavecom of 15 million. So those elements comprised the 10.5 million of operating cash flow in Q1.

Comparing non-GAAP Sierra Q1 results, which exclude Wavecom, sequentially to our Q4 results, again on a non-GAAP basis, revenue decreased by 24% to 100.4 million from 132.9 million in Q4.

PC Adapter sales decreased by 25% to 76.1 million from 101.2 million in Q4 and within this category, USB sales were 64.2 million and PC Card sales were 11.9 million. The sequential revenue decline in our Adapter category was driven by a combination of a number of factors -- firstly, lower ASPs on new products; secondly, tighter inventory management on the part of operator-customers; thirdly, the impact of the global economic slowdown; fourthly, product transitions with both Sprint and Telstra; and finally, we saw a small share loss at AT&T.

Q1 OEM revenue was 14.7 million compared to 21.6 million in the fourth quarter. Within the OEM category, Q1 sales to PC OEMs were 3.5 million compared to 7.2 million in Q4, and this reflects the expected decline in revenue from PC OEM customers which is a trend we've seen for several quarters.

Q1 sales to M2M OEM customers were 11.2 million compared to 14.4 million in Q4 2008. This sequential decline was driven mainly by the global economic slowdown and a product transition with one of our larger M2M OEM customers.

Our Mobile and M2M gateways revenue was essentially flat in the quarter from Q4 at $8.2 million.

During the quarter, AT&T and Sprint each accounted for more than 10% of our revenue and in aggregate, these two customers represented approximately 50% of our non-GAAP revenue and that compares to Q4, which represented 57% of revenue.

Our non-GAAP gross margin of 27.2% was fairly flat from Q4, which was 27.5%. Our non-GAAP operating expenses decreased to 22.4 million from 25.5 million in Q4 of '08. That's a result of our increased focus on past cost management: during the quarter, as well as the impact of the restructuring which we completed in late January of 2009.

Our Q1 operating results included recovery of approximately $750,000 in research and development as a result of an amended agreement with TPC Canada.

Non-GAAP earnings from operations decreased to 4.8 million compared to 11.1 million in Q4 2008. This resulted in an operating margin of 4.8% compared to an operating margin of 8.3% in Q4 '08.

Looking at key balance sheet items, I spoke about cash earlier. Consolidated accounts receivable increased to 86.3 million from 67.1 million at the end of December, excluding Wavecom accounts receivable at 25.1 million. DSOs at March 31, 2009, were 52 days.

Consolidated inventory increased to 39.9 million compared to 33 million at the end of December. 7.6 million of this increase relates to the addition of Wavecom.

Looking at revenue by product line, comparing Q1 to Q4, and this is for Sierra only, so non-GAAP Sierra only. Our Adapters business declined by 25% to 76.1% and contributing 76% of our revenue. Our OEM business declined by 32% to 14.7 million representing 15% of our revenue. Our Mobile and M2M business was flat at 8.2 million, representing 8% of our revenue and other revenue was approximately flat as well at $1.4 million.

Looking at revenue by geography, again for Sierra only, in the Americas, our revenue declined by 26% to 73.2 million. America's revenue represents 72% of our revenue. Europe was flat at 10.5 million, representing 11% of our revenue and Asia-Pacific was down by 28% to 16.7 million, representing 17% of our revenue.

Moving onto guidance, we're providing financial guidance for the second quarter ending June 30, 2009. This guidance reflects our current business indicators and expectations. This guidance is on a non-GAAP basis, which excludes Wavecom transaction and integration costs, restructuring costs, stock-based compensation expense, purchase price amortization and FX exchange amounts -- FX foreign exchange on amounts related to the Wavecom acquisition.

Our guidance for the second quarter reflects the uncertain macro economic environment and also includes some revenue contribution from expected new product launches, which causes us to be cautious regarding revenue trends in the near term. In addition, with the acquisition of Wavecom, we expect to have increased foreign exchange exposure in our results going forward.

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. All figures are based on management's current beliefs and assumptions and are subject to change.

So looking at Q2 non-GAAP guidance, we expect that revenue for Sierra on a non-GAAP basis to be $108 million, so that's up 8% from the non-GAAP Sierra in Q1. Looking at Wavecom, Wavecom non-GAAP of 31 million U.S., that's up 9% from their Q2 results -- sorry, Q1 results.

Moving to earnings from operations, on the Sierra side non-GAAP of plus 7.5 million, so that's an increase from the 4.8 million that we saw on the non-GAAP basis in Q1, and looking at Wavecom earnings from operations, we are guiding a loss of 9.5 million, which is an improvement from the loss of approximately 12.5 million that they incurred in Q1.

So on a consolidated basis, consolidated revenue of $139 million, earnings from operations of minus $2 million, net loss of approximately $2 million as well, resulting in a loss per share of $0.06 on a non-GAAP basis.

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

Thank you, Dave. In the first quarter of 2009, we posted better-than-expected financial results, launched new market-leading products and achieved a major strategic milestone in completing our acquisition of Wavecom. I believe that our operational execution in Q1 was very strong, particularly given the overall macro economic climate and the added burden of our strategic initiatives.

Our business has stabilized. We've streamlined our cost structure. Bookings and sell-through were solid and our Q2 outlook has improved. I believe we've executed very well on the Wavecom transaction as well, a very complex, public-to-public multi-national deal. In less than five months from the date of announcement, we defeated a competing bidder, completed the transaction, acquired essentially all the voting rights in the Company, effected a change of control, delisted from one exchange and have integration well underway.

In addition, I'm very pleased at the level of team engagement and the joint customer initiatives that are also well underway. At this early stage, I'm very encouraged by what I see. Strategically, this is absolutely the right combination for us. We have an improved strategic position in key markets, a more diversified business, a stronger platform to enable a larger position in the value chain, an impressive global footprint and channel, unmatched R&D capability and improved scale and purchasing power.

I have no doubt that a combined Sierra Wireless-Wavecom will be a global force to be reckoned with. As we look forward, we're enthusiastic and realistic. Our task is large and has considerable risk, but we're confident. We will continue to focus on strong operational execution in a difficult environment and a successful integration with Wavecom.

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

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator instructions). Your first question today comes from Chris Umiastowski of TD Newcrest. Please go ahead.

Hi. Thanks very much, and congratulations, guys, on posting pretty strong organic results from the Sierra side, and integration of Wavecom looks like it's on track. I guess just a few questions. The first thing is, Dave, I noticed you mentioned in your guidance commentary that the headcount reductions at Wavecom are expected to save $16 million annually. The guidance for Q2's Wavecom will lose $9.5 million from operations in the quarter. Now, I realize you said that you won't be seeing this deal as accretive until Q1, so is that about right, where we're expecting that you're still going to be losing kind of five, six -- well, not quite that much, but several million dollars over the next few quarters, per quarter, until you get to the break-even point at the end of the year?

Well, I mean, we've provided a modest -- guidance for a modest loss in Q2, and obviously Q2 continues to have some expenses that will come out in the second half of the year as we enjoy the benefit of the restructurings that are happening now. So that's the best answer I can give you.

Okay. So the actions that you guys have taken so far in Q1 and will take in Q2, they'll collectively result, then, in $16 million in annual savings, is that correct, and is there still more plans for cost reduction beyond Q2?

There's a couple steps here, Chris. The first step is we're working through the restructurings of both companies, and you saw what we did in January, and Wavecom did some in Q1 and it is doing some additional restructuring in Q2. And then there are a whole bunch of integration initiatives that we are working through right now, and not prepared at this time to identify them and size them, but those initiatives should improve the financial position of the Company as well.

Okay, that's fair enough. Next, I'm interested in, Jason, your comments that you made, your first Gobi design win and that you expect more. What is the ASP like on those deals compared to your prior PC OEM deals, and how do you see that business shaping up for you?

Well, I think, first of all, on the ASP question, the ASPs are lower. The gross margin is also lower, but I think the contribution margin can be considerable given there's very little R&D investment from a development standpoint on the Gobi modules. Basically, our heavy lifting will be in the integration support, which isn't cost free, but it's lower cost than development activities.

And I think looking forward, Chris, we've got pretty realistic expectations there. I think our most likely PC OEM candidates are the tier 2 guys to get Gobi design wins with. And by the way, we're continuing to get design wins with our organic modules as well for key markets.

So I'm not about to say this is the next big strategic thrust for the Company, but I'm -- it's a situation that I think is going to turn better rather than get worse.

Okay, that makes sense. I guess the next thing I'm curious about is the -- I mean, I totally understand your end-to-end strategy, don't have a lot of questions there. The PC market, I'm really curious if you're seeing any traction towards -- any of the Chinese vendors coming towards North America. I realize I don't think they're anywhere near AT&T and Sprint yet, but hearing that they're making their way into T-Mobile USA. Anything there that worries you in terms of guys like [Wawei] coming into the North American market?

And then the next part of that question, related to the same USB modem market, is are you seeing any signs at all that the North American carriers, the big ones in particular, are going to change the way that they charge, get a bit more creative to drive more demand? For example, in the UK there's a lot of daily access passes. You can just pay one pound a day for broadband access, and we haven't really seen that yet in North America, and I think it would drive sales. I'm wondering if you've seen anything there.

Yes. I think that -- so, first of all, am I worried about Asian competitors coming -- more Asian competitors coming into the US market? Yes, of course. I mean, that's something that we always keep our eye on, and we're very careful, particularly with our big US customers AT&T and Sprint, to build -- continue to build fortresses around them and do the best we can to defend our share. I feel very good about our position there, even in the presence of Asian competitors coming in and getting new channel slots with operators like T-Mobile.

So I don't see any imminent threat in our big channels, but of course, it's something that keeps us up at night and also keeps us investing in protecting those accounts. And I think we're doing a great job doing it, by the way.

With respect to your other question, now I've forgotten what it was, sorry. I got off on a tangent there.

No problem. I was asking about the model changes in terms of the way that carriers are charging in order to drive more sales -- daily access passes, things like that.

So we've been observing that in Europe. To your point, we've seen a lot of aggressive service plans get launched. I think that the operators, particularly the ones we deal with in the US,, are going to be careful. I think that if you talk to operators in Europe, they'll tell you that a lot, a lot of the margin in mobile broadband services has come down, and that's really been driven by their own price competition on the service side. So I think the US operators are going to be a bit cautious. They view the space as very important from a growth standpoint, but also a margin standpoint, and I don't think they want to take the margin out of that business straightaway.

So will we see more creativity and aggressiveness? I think you will, but probably not quite to the degree you've seen particularly in the UK market.

Okay, that helps a lot. And then I was just hoping you might elaborate a little bit on your prior answer about having built up a nice fortress and done a really good job to solidify your position with your major customers. Can you describe a little bit in more detail what makes you guys feel so comfortable that you've got a solid position with your existing customer base in the face of competition from guys like [Wawei]?

Yes. I think a lot of it's intangible. I'm not going to give you all our secret sauce, but I think on the relationship side we are extraordinarily well positioned. I think that with the Wavecom transaction, by the way, we become actually more strategically important because we cover more waterfront. We're in a position to deliver more revenue-generating solutions and put them on their network.

We've invested a lot in sales support in a variety of channels, including retail. And we are investing a lot on the R&D side to make sure that our product portfolio is driven by our key customers, and I think that really shows. We're delivering our key operator customers the products they need when they need them and then helping them to sell those products, and that's resulted in really good relationships, clearly with our top three operator customers.

Okay. Thanks very much for the detail. I really appreciate it. I'll pass it on.

Your next question comes from Amir Rozwadowski of Barclays Capital. Please go ahead.

Thank you very much, and good afternoon, gentlemen.

Hi, Amir.

Hi, Amir.

In terms of your guidance, it seems as though that you're comfortable around sort of sequential growth, at least in your organic business, and it seems like there are a couple of factors there, Jason. I just wanted to clarify sort of what is driving that sequential growth. Is it sort of channel inventory is lean, so there needs to be sort of a restock, or do you see traction with some of your new products, or is it sort of demand seems to be improving?

Well, I think it's a variety of things. Clearly, in Q1 we did see a pretty aggressive tightening on the inventory side. And as we explained, a number of other factors kind of depressed Q1, if you will, relative to Q4. I think that the business has stabilized, and we've seen some increased promotion, particularly from AT&T. I don't know if you've seen the new television advertising campaign. Sprint has been quite aggressive. We have a new product just recently launched with Telstra, so we had modest contribution in Q1. We expect greater contribution in Q2.

So I think the operators are feeling a little bit more comfortable with the state of the market, and we are seeing continued stable and even growing sell through in some channels, and that's given them some confidence to keep the orders coming and to have product keep flowing into those channels. And like I said, new products, particularly with operators like Telstra, are going to be significant contributors too.

On the embedded side, we also saw a key product transition, right, so that kind of held us back a little bit in Q1. And now that those products are fully integrated and that customer continues to sell volume solutions, and that's going to help as well.

Do you expect some of your newer HSPA-Plus products to make their way into some of your other larger carrier customers?

Well, I hope so. I hope so. We're working on that. And I've got nothing to report on that, but we're trying hard. We're trying hard to take advantage of our first-to-market position, right? I think we're a good quarter ahead of our competition, maybe even two. And I think that puts us in an interesting position if carriers are concerned about getting either a [future- proofed] product out there today or to moving to new higher speed services.

But embedded in your guidance isn't the expectation right now?

Embedded in our guidance is not an expectation for a new major carrier launch with HSPA-Plus.

Okay. Okay. And then just shifting to sort of the integration with Wavecom, I'm just trying to understand sort of this thought process of being able to achieve break-even. Is it based on sort of the way you sort of see your top line trajectory right now with the cost cuts that you've already announced and given us further color on, or should we anticipate that break-even requirement requires additional synergies from supply chain management or optimization and so forth?

Yes, I think you should assume that it does require us to capture some synergies.

Okay.

So a little bit of growth -- not a lot of growth, but certainly kicking in some significant synergies on the cost of goods side, and there's obvious OpEx synergies we need to be tuned into as well.

And then, lastly, on Wavecom's business, I mean obviously the exposure to the automotive market has been a challenge for the last couple of quarters. Knowing that you folks announced a new partner in Asia, how should we think about the trajectory of that business right as it stands now? Do you see that similarly bottoming?

We do, we do see that bottoming. I think that -- and we've said this in the past -- we're pretty excited about a couple of design wins that Wavecom has that haven't yet turned into revenue contribution. I think in Q2, we'll start getting revenue contribution from Denso in support of the Toyota Lexus launch. And hopefully by the end of the year, we'll start getting contribution from a European car manufacturer as well.

Both of those are very nice design wins that could result in significant volume, and we're working hard to get additional design wins. Kind of a surprise maybe for the market too is that Sierra, on a standalone basis, we got our first automotive design win with Magneti Marelli, who also happens to be a Wavecom customer, so I think that's an interesting point of leverage.

Great. Thank you very much for the additional color.

Thanks.

Your next question comes from Barry Richards of Paradigm Capital. Please go ahead.

Nice quarter. I just want to expand on that previous question. So with respect to Denso, Wavecom initially announced a contract for 10,000 units but talked about a much bigger opportunity, which you also just touched on. I wondered if you could just say whether you have an additional purchase order or what the hurdles are for getting that additional work.

Yes, I don't -- I'm unaware of the 10,000 unit order you're talking about, but the design win that Wavecom has with Denso, it's for Toyota Lexus, and it's for a launch in the US. And certainly the expectations are far beyond 10,000 units.

I think on their last call, they mentioned a couple million units a year for three years, but that's not been press released. The original press release says 10,000 units.

Yes, I'd be careful not to have our expectations go that high too, but our view is it's a potentially high volume implementation. So, yes, this is a solution that's going to be shipped to the automotive's -- the car company's manufacturing line. It's going to be put in, not after market, but in the factory and delivered to market, so --.

Understood.

-- all indications are it's going to turn into volume.

I understand. So clearly you're excited about the opportunities, and I think that's pretty clear. I wonder if you could just touch on what you think the biggest hurdles are in the first, say, 100 days of this integration. What are the things that are giving you the most concern, if any?

Well, I think there's uncertainty, right? It's a -- we haven't yet announced the specifics behind the combined structure. That will happen soon. And that, of course, creates some uncertainty with employees and the fact that there's a restructuring currently under way, and Paris is not helping with that level of uncertainty, so those are concern points. I think that we're very close, from a timing standpoint, of getting through a couple of the uncertainty overhangs, and I think that'll help people feel a bit better and get the dark cloud behind us.

So beyond that, I think I sense a great deal of enthusiasm within the Company for the strategic concept of combining the two companies. Of course, that comes with the pragmatic realities of having to put them together, and the resulting restructuring and potential effect on jobs. So I think once we get through that uncertainty period, that gets that behind us and we're ready to focus on the real exciting part, and that's making the two companies work well together.

Okay, thanks, and good luck.

I think it's pretty well received within the customer bases of the two companies, so there hasn't been any meaningful objections to the two companies coming together.

Yes. In fact, quite the opposite.

Yes.

We've had some very positive joint customer meetings, and that leads me to conclude that we definitely have share gain opportunities as a result of the combination.

Thanks again.

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

Hi. Good afternoon, gentlemen, and congratulations on the quarter.

Thanks, Dev.

Thanks, Dev.

Jason and Dave, I have a few questions, but I'm going to fire them off in rapid-fire fashion. First, on Wavecom, in terms of, I guess, if you see your breakdowns, you're looking at $11 million for one month of Wavecom results in terms of revenues, that, if I can do simple math, $33 million in terms of the quarter. Based on the last results of Wavecom, they have shrunk, but they are kind of steady in Q3 and Q4 [of Wavecom standalong] near around, I would say, $44 million US based on EUR20 million. Have they shrunk further, Jason, in terms of revenue capability? And if so, where do you see being the trough here?

Also, in terms of OpEx, their OpEx was higher, and you guys have trimmed down the OpEx, as well, significantly. So I'm just wondering, on a standalone basis going forward with respect to Wavecom, what do you see the revenue or the break-even point, because even the margins have gone down. They went, like, from 49% to 42% in Q4, and now they look like they're about 35%. So if you can just comment on your dropping of the revenue and dropping of the margin, what do you think is the most likely kind of combination going forward?

So, yes, maybe Dave and I will tag team this. So just to comment on the top line first, you're right, Dev, revenues did decline for Wavecom Q4 to Q1. So on a US dollar basis, full Q1 for Wavecom was $28.5 million, US dollars, so that represented some erosion. The quarter was somewhat back-end loaded. That's why we got the $11 million in March. By the way, that's not an uncommon pattern in Wavecom's revenue, for it to be back-end loaded in the quarter.

And Dave, you want to comment on OpEx and break-even point?

And also the margins, Jason. Margins went down another 7 points, from 49% to 42% in Q4, and from there on now to 35%. So I expect them to come up as the wins kind of convert into revenues, but I just wanted you to give some more color on that.

Yes, sure. So I'll take -- on the gross margin piece, yes, a little bit of additional gross margin erosion there, and for a couple reasons. Number one, when you put that into the Sierra Wireless model, we shift around some of the P&L geography, so just by the way we treat gross margin and where certain costs go, we take down the gross margin percentage as we apply our model to the Wavecom business. The reason being is some of the -- some of Wavecom's quality expenses, as opposed to be in cost of goods, are actually in OpEx, so we shift that back. We take those quality expenses and put them where ours are, which is in cost of goods, and that has the effect of bringing down the gross margin percentage but keeping the operating margin the same. That's one factor.

And the other is mix. There's been a bit of a mix shift in Q1 that had a drag on gross margin, and some ASP movement as well. Wavecom has in the last year lost share, I think as a result of some of their pricing positions, and they've been getting a bit more aggressive, and I think that's okay. We're not overly excited by those moves because we sense that there's an ability now to recapture some of that lost share, and I think on balance, that's a good trade.

And then looking into Q2 on the top line, we do --

Sorry, just to interject, just on gross margin, Dev, there was in the quarter some inventory cleanup at Wavecom as well, which had a depressing effect on gross margin.

Okay.

So that is another factor.

So we thought Q4 was bottom on top line, and it doesn't look like it was. But Q2, we feel quite confident that that's the beginning of the recovery. So we're looking at Q1 as bottom and we're looking at 9% sequential growth in Q2.

Okay. And where do you expect, given, I guess, the new accounting and the stabilization of gross margins, to be the break-even point in terms of revenue, just an approximate range?

Well, I'm going to be careful on that, Dev, because we've got a lot of movement on the OpEx side too, right? There's OpEx currently coming out, and we haven't yet fully explored potential OpEx synergies as well. So we're going to be careful on that point, and we'll give you more color on that on the next call. That's our commitment.

Okay. So Jason, just in terms of -- I guess I might have had a blonde moment here, but AT&T is still -- I mean, you guys are shipping 306, 307 series to AT&T, right?

No, we are not, Dev.

Okay.

We are not.

Okay. And now, there was an announcement in April from Sierra regarding Verizon as being available and being compatible with Verizon network. Is that to be construed in any way by all of us as a future shipping point? And if it is, then was it a direct Verizon win that normally Sierra would announce? Is this kind of a lower volume, and are they a different channel kind of opportunity? How should we think of that?

Yes, it's the latter, Dev. Don't think of it as the selling directly through Verizon, high volume model. It does, however, provide us access to some of our key enterprise customers who have been putting a lot of pressure on us and Verizon to get our products available on the Verizon network.

So it broke that logjam, and it also opens up some other channels as well, in particular MVNOs that rely on the Verizon network, and also non-Verizon retail channels. So we're piecing together all of the blocks -- all of the building blocks on what that channel looks like, but clearly the B-to-B piece so we can service our enterprise customers was key, as well as some of these MVNO channels that had (inaudible) pull on it. So it unlocked that market for us, and now we're looking to leverage it to open up additional channels.

Okay. And just if you can quickly give us the [kind of] launch, of actual shipping quarters, for these products -- I mean, you had Telefonica demonstration of the CDI. You have a Compass 888 that you talked about just now on O2 [win.] AirCard 402 with respect to Sprint you said early Q2. Additional design wins on Gobi, and then MC 8700 in terms of your comment, having secured additional design wins. If you can just tell us what quarter is going to be the first quarter for shipment of all these new products, that would be great.

Boy, that's asking a lot. Well, the AirCard 402 has already commenced shipping. And so that has been shipping to -- actually, right at the end of Q1, we started shipping the AirCard 402 to Sprint. That's now been launched, as I indicated. And we view that, by the way, as more of a B-to-B play. That's probably not going to be a retail play, but an important successor product nonetheless for enterprise customers.

The USB 306 is already shipping. We started shipping to Telstra in Australia, and we have since started shipping to CSL in Hong Kong and, we hope, additional customers in the future as well. The Compass 888 has also commenced commercial shipment, so that started -- actually, it started in Q4 with SoftBank in Japan. And we launched with a handful of smaller operators in Q1 and commenced shipments to those customers too.

So stay tuned on, hopefully, additional operator channel wins on all of those products. And on the embedded module products, in particular the MC 8700, I would look to that to start contributing revenue in the second half of the year.

Okay. I've got a list of questions, but I'll stand down and be back in the queue. Thanks a lot for answering my questions, Jason and Dave.

Thanks, Dev.

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

Hi, good evening. I just wanted to ask about the restructuring. I think earlier in the commentary, you mentioned that you had cut 90 people. Can you just -- and I think I missed some of the points, so can you just repeat those and maybe let me know how many additional people you expect to cut? And does the 16 million US in annual savings -- does that include the 5.5 million you did for Sierra Wireless, or is that just for Wavecom only? Thanks.

Sure. So maybe I'll just kind of build that up. On the Sierra side -- and Sera, I would view these as standalone restructuring initiatives. On the Sierra side, we reduced by 56 positions. That happened in January, and that results in annualized labor cost savings of $5.5 million. And then back in Q3, on the Wavecom side, they had announced a cost reduction initiative. That, separately, now is also under way. In February, that affected some of the Wavecom US employees. That was about 40 positions. And now under way in Europe are additional reductions, some of them contractors, and that's 90 positions, for a total of 130 positions. And that will result in an additional 16 million in annualized savings.

So with -- so then that means that there's still additional -- I guess still additional cost savings potential based on the original EUR12 million to EUR16 million cost savings that was announced. Are you still planning to reap benefits on that, or is that kind of off the table now and you're focusing more on the 130 people?

Well, the 16 million is the low end of that range, right?

Okay.

So, no, we're still focused on achieving those savings.

Okay, great. Thanks. And --

That's on top of future integration initiatives, Sera.

Okay. And do you have an idea on how much future integration initiatives could help reduce additional costs? Do you have a range?

Yes, I think that's coming together, and as I indicated, we're going to give you more detail on that, both on the cost of goods and cost structure side, on our next call.

Okay, great. And just on the gross margin for Wavecom, what kind of gross run rates -- gross margin run rate can we expect for the business going forward? And I'm just wondering do you expect additional price erosion, or is this kind of the trough as well in terms of price competition -- or I mean, in terms of pricing? Sorry.

Well, I think, first of all, Wavecom's got quite a broad product lineup, and so a lot of this is mix driven. Several of their products are very high gross margins, some of them are lower gross margins, so a lot of it depends on mix on a quarter-to-quarter basis. But the way we're thinking about the Wavecom business as we model it with our own is that those products should, in the aggregate, drive gross margin in the mid-30s when we put it through our own model. And we're looking at combined gross margin percentage in the 30% range, hopefully a little bit higher.

Okay, great. And are the Wavecom contracts priced in US dollars or euros? I guess I'm asking this question because earlier you mentioned that you're going to have greater FX exposure going forward, so I'm just wondering if you plan to hedge that.

We haven't specifically developed a hedging strategy yet, Sera. It's something that we're looking at to look at the economic exposure of both companies together and map out what the natural hedges are and address any other net exposure there.

Okay. So the contracts are priced in euros, then?

Contracts?

Or the Wavecom deals, or the revenue, like --

No, they have -- I mean, it's a worldwide company, so they have US revenue and they have euro-denominated revenue.

Okay.

About half of their revenue -- approximately half of their revenue comes from Europe. Their cost of goods --

Are predominantly US.

-- are predominantly US dollars, and of course they have a global staff, right?

Thank you. And I'm just wondering if you can talk about your go-to-market strategy as a combined entity with Wavecom. Do you plan to have one sales force for both the adapters and the M2M, or do you plan to make that separate?

Well, I think more detail to follow on that, Sera, but certainly we view the channels and customers of embedded solutions as quite different from the channels and customers of PC adapters. So those I think -- just as we do as a standalone company, we have very distinct and separate sales initiatives for those different customer segments. I think you can count on us continuing to do the same. So think about who are the primary channels and who are the primary customers, and if they're dramatically different, I think we have to have different go-to-market strategies for those channels and customers, so more to come on that. I don't want to disclose too much, and we'll probably give you some more information on the next call.

Great. Thank you.

Sure.

Your next question comes from Naser Iqbal of Salman Partners. Please go ahead.

Hi, congratulations on the quarter. Dave, I just had a quick question on your intangible amortization. Your total acquisition amortization was $2.2 million. Is it safe to assume that the increased amortization from your normal $1 million or so is due to the acquisition costs?

Yes, that's right. And those are preliminary estimates, Naser, and also that would only reflect one month's worth of amortization on the Wavecom acquisition.

Great. Thank you very much.

So I think right now, a full quarter of amortization on the Sierra side for the AirLink acquisition is around $600,000, and we're -- the rest would be related to purchase price amortization of the Wavecom acquisition.

Thanks, Dave.

And Luke, we'll take one more question, then we need to drop the line.

Your final question comes from Stephen Li of Raymond James. Please go ahead.

Great. Thanks. Hi, Jason. Hi, Dave. Just a couple questions. Jason, on Wavecom, you're obviously expecting a Q2 recovery. Can you maybe give us a bit more color, even if it's only directional, which vertical is growing again at Wavecom? Is it the automotive, or is it the industrial M2M?

It's -- well, I think one of the key moving pieces there, Stephen, is automotive, and in particular, commencing shipments to a key customer in Asia. We expect that will be a contributor in Q2, so that's a significant piece, as well as just kind of a general stabilizing of the business that's pretty broad-based.

And between the geographic regions EMEA and America, I mean, both of them have [bottomed] for Wavecom?

That's our expectation. There could be a few moving pieces there, but our expectation is we've got a general recovery under way there.

Okay, great. And a question on the PC adapter guidance. Dave, how many product transitions you've got built into that guidance?

On the adapter side?

On the -- yes.

It's actually a fairly clean quarter for major transitions with adapters.

Yes, relative to Q1, it's a cleaner quarter, I would say, on product transitions with customers, or reliance on new product launches is probably a better general way to put it.

Okay, great. Thanks, guys.

All right, thanks. Okay, callers, well, thank you very much for joining the call. And Luke, I don't know if you want to take over from here, but we're ready to end today's call.

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