司亞樂 (SWIR) 2009 Q2 法說會逐字稿

Thank you for holding for the Sierra Wireless second quarter results conference call. Please note that this conference call is being recorded. I'd like to introduce your speakers, Mr. Jason Cohenour and Mr. Dave McLennan. Please go ahead.

Thank you very much. This is Jason Cohenour speaking. And thank you, everyone, for joining today's call. With me today is Dave McLennan, the Company's CFO. And a reminder that this presentation today is being webcast, in addition to having the [con call] bridge set up. And I understand there's a slight delay on the web broadcast, so we may not be in perfect sync with those who have dialed in to the con call bridge. Also a reminder that the material we're presenting today will be available on the Company's website following the call.

A reminder of the Company's safe harbor statement. We're not going to read it into the record. It is being webcast right now on slide two. But the contents of today's call is subject to this safe harbor statement.

The agenda for today's call. I'm going to provide a quick business update. And I'll then turn the call over to Dave, who will cover Q2 financial performance and Q3 financial guidance. I'll then summarize. And then we'll enter the second part of today's call, which is a bit of an overview of Wavecom and the key M2M markets, a discussion on the combined Company positioning, including synergies. And then we'll open the line up for questions. We'll try to step lively, as, again, the material that we're being -- that's being discussed on today's call will be available after the fact, as well.

To the business overview, slide five. In the second quarter of 2009 we experienced solid revenue of $135.3 million, helped by significant sequential growth from Wavecom. We also shipped a record volume of over 1.5 million units in the quarter; drove a significant improvement in gross margin of 720 basis points to 34.8% as a result of strong product cost reduction efforts as well as some early synergy contributions. Our strong gross margin, combined with good cost management, drove stronger than expected non-GAAP earnings from operations. We also achieved strong cash flow from operations of $18.5 million, and ended the quarter with over $131 million in cash and equivalents, significantly better than where we expected to be.

Additionally, we've started to experience some of the diversification benefits expected from our acquisition of Wavecom. Customer concentration in the quarter was down, and our product line and geographical diversification improved significantly. While executing on our business, we also completed our acquisition of 100% of the Wavecom shares, implementing a minority shareholder squeeze-out and delisting the Wavecom shares and ADRs from the Euronext and NASDAQ exchanges.

We also made good progress on our integration of the two companies. We've appointed and announced a new-look executive team, implemented organizational structure changes, taken significant cost reduction steps, captured early product cost synergies, and leveraged our combined resources to secure OEM design wins representing market share gains and thus revenue synergy. Our integration is going well and is on track. We believe we're well on our way to creating a global leader in wireless solutions for mobile computing and M2M.

Moving to product line updates, I'll start with our AirCard product family, which includes our PC Cards, ExpressCards, and USB devices. Q2 AirCard sales were $77.7 million, up 2% sequentially and down 25% year over year. We believe our business and channel position in this segment is stable, and that the year-over-year decline is attributable mainly to the weak macroeconomic environment and tighter inventory control [at] key channels. AT&T, Sprint, and Telstra continued to be key revenue drivers in Q2. We believe our channel position with these key operators continues to be strong.

During Q2, we commenced shipments of our new AirCard 402, an innovative 2-in-1 card designed to be used in both PC Card and ExpressCard slots. AirCard 402 was also launched by Sprint during the quarter. Telstra announced an upgrade to its Next G network, boosting uplink speeds to 5.2 megabits per second, to go along with the industry-leading 21 megabits per second maximum on the downlink. Enhanced Next G service continues to feature the Sierra Wireless USB 306, the world's first HSPA+ device.

We also launched our new USB 598 with Telus in Canada. Telus is also our first operator customer in North America to implement our TRU-Update feature and hosted service, simplifying the end user experience for downloading firmware and software updates.

We have a number of new AirCard products scheduled for launch in the second half of 2009. Our new products have received an encouraging reception from the market. And we have already secured launch commitments with leading operators for some of these products. We expect the new products to contribute significantly to our Q4 2009 results.

Moving to our embedded solutions product line, in Q2, revenue from our embedded solutions was $44.8 million, up 83% from Q1 and up 10% from Q2 of 2008. Virtually all of our sequential growth was driven by the addition of Wavecom. With Wavecom, we now have the broadest embedded lineup in the industry, covering 2G to 3.5G, CDMA, and GSM, connectorized, solderdown, and specialized solutions for specific segments such as automotive. Our lineup also includes a rich suite of software, from protocol stacks to operating systems to host drivers, integrated development environments, traffic management software, and even user interface software. In addition, we have a global professional services capability and a hosted device management service.

We have many weapons now to leverage in continuing our drive for leadership in this space. Our products and global capabilities have enabled us to establish a highly diversified channel and customer base, covering many regions and growth segments.

During the quarter, sales to the M2M and automotive segments drove 96% of our embedded solution revenue. We commenced volume shipments of a customized automotive module to Denso in support of their global automaker customers. We announced a collaboration with Meta Systems of Italy to develop telematic solutions for the automotive and insurance markets.

We introduced new products, including our Q26 Elite for CDMA 1X, which is specialized for harsh environments and automotive applications, as well as our Mini Card 5728 for EV-DO Rev A, delivering mobile broadband capability to mobile computers, networking equipment, and other solutions requiring high bandwidth.

We also secured several interesting design wins in the quarter, including two in consumer electronics and another automotive win in Europe. We also leveraged the resources of the combined company to secure new M2M design wins, which we believe represent share gains from incumbent competitors.

While PC OEM was a small contributor in Q2, we were awarded two additional Gobi design wins with notebook and netbook manufacturers, bringing our total number of Gobi wins to four. We expect to see revenue contribution from these design wins in the second half.

Moving to mobile and M2M gateways, Q2 gateway sales were $10.2 million, up 11% from Q1 and 23% from Q2 of 2008. Wavecom contributed $2.4 million in gateway sales during the quarter. This line of business continued to contribute strong gross margin of over 50%, strong operating margin, as well. North America continued to be a key driver for gateway sales, although we are investing significantly in expanding our sales in Europe, Asia, and Latin America, as well. We expect growth in these regions in the coming quarters.

(Inaudible - technical difficulty) product side, we announced that our ALEOS embedded software platform is now available on the MP line of rugged mobile routers. This integration -- all of the former AirLink and CR Wireless legacy gateways are now running a completely re-architected and common software platform, simplifying application integration, deployment, and support. Also during the quarter, several of our new gateway products received network approvals from leading operators.

One of our key integration focus areas is to drive leverage between our gateways business and our newly acquired solutions and services business. To that end, our mobile and M2M, and solutions and services teams have been actively engaged in integrating our gateway products with our new M2M operating portal, putting us in a strong position to offer end-to-end hosted solutions, customers, and partners. In addition to this integration activity and the associated solution packaging efforts, we continued to invest in segment and geographical expansion of our gateways business.

Moving now to our solutions and services business. Our newly acquired solutions and services business was a small contributor to overall revenue in Q2, but we're very serious about growing this business into a key revenue and profitability contributor over time. Based in Toulouse, France, this business, while small, has a collection of very compelling software and services technology assets which are in place, operational, and now proven in live customer environments.

Our intention is to sell our portal services, tools, and applications on a software-as-a-service basis directly to select enterprise segments, through channels, and even through mobile network operators. These efforts are well underway and will expand over time.

As an introduction, there are three critical components to our software and solutions offering. The centerpiece is our M2M operating portal. This is a highly scalable, secure, hosted services platform that provides the core wireless device management, asset management, subscription management -- that's facilitating activations and deactivations -- and APIs for custom application development.

The second element is the embedded M2M-ready agent. This open source, embedded agent facilitates the connection of the remote device through the M2M operating portal, and is designed to work with a broad range of wireless devices and modules, including those of our competitors.

The third element is our patented M2M Developer suite, an Eclipse-based, integrated development environment designed for embedded applications, that is, applications that run directly on the module, as well as web-based applications. To reiterate, this offering is much more than an idea on PowerPoint. We have active customers using the portal and tools, and have recently secured new design wins.

With that, I'm going to turn the call over to Dave, who will cover Q2 financial results.

Thanks, Jason; and good afternoon, everyone. Our results are reported in US dollars and are in accordance with US GAAP. As well, in order to better understand our operating performance, we provide non-GAAP results, which exclude the impact of several things, including stock-based compensation, purchase price amortization, Wavecom transaction costs and transaction-related FX gains or losses, and restructuring and integration costs.

Our second quarter results are as follows. Revenue was $135.3 million. Revenue from Sierra only was $101.9 million. That's flat relative to Q1. And revenue from Wavecom was $33.4 million. That's up approximately 17% from the full Q1 pro forma revenue of $28.5 million. GAAP gross margin was 34.8%. Non-GAAP gross margin was 34.9% after adjusting out stock compensation of $146,000.

Gross margin from Sierra only was 32.5%. That's up significantly from 27.2% in Q1. This increase in gross margin at Sierra was driven by very successful product cost reduction initiatives on key AirCard products, as well as some early product cost synergies. In addition to a higher gross margin from Sierra, we also benefited on a consolidated basis from the blending in of higher gross margin revenue from Wavecom.

Moving to GAAP operating expenses of $63.3 million and non-GAAP operating expenses of $44.5 million. This non-GAAP measure excludes $6.1 million of purchase price amortization, $8.5 million of restructuring costs associated with the expenses of the various restructuring initiatives in the quarter, integration costs of $900,000, transaction costs of $800,000, and stock compensation of $2.6 million. So those are the exclusions from GAAP to get to non-GAAP operating expenses of $44.5 million. Our GAAP loss from operations was $16.2 million, and non-GAAP earnings from operations after the above adjustments was positive $2.8 million.

Moving to the net line. GAAP net loss was $5.9 million, and non-GAAP net earnings were 1.5 -- positive $1.5 million, which, in addition to the non-GAAP adjustments above, further excludes $11 million FX gain on intercompany balances between Sierra and the Wavecom acquisition company, as well as $600,000 of related tax and minority (inaudible).

So that's the walk-through of GAAP to non-GAAP results. Comparing our non-GAAP results to the non-GAAP guidance we provided for the second quarter, revenue of $135.3 million was below our guidance of $139 million. The shortfall is partially a result of lower than expected sales of one of our recently launched AirCard products, partially offset by slightly stronger sales of Wavecom products.

Despite the small miss on the top line, non-GAAP earnings from operations of $2.8 million was better than our non-GAAP guidance of a loss from operations of $2 million. This reflects good OpEx management during the quarter and stronger than expected gross margin, driven by product cost reductions and early product cost synergies. Similarly, non-GAAP net earnings of $1.5 million, or $0.05 per share, was greater than our non-GAAP guidance of a loss of $2 million, or a loss per share of $0.06.

During Q2, we began to see the diversification benefits of the Wavecom acquisition on things like customer concentration, geographic distribution, and product mix. During Q2, our two largest customers were Sprint and AT&T. Combined, they contributed 42% of consolidated revenue. This compares favorably to Q4 2008, which was the last quarter prior to the acquisition, when these two customers contributed a combined 57% of our revenue.

With Wavecom, we have a broader geographic distribution and have become less North American centric. In Q2, 59% of our sales were from the Americas, compared to 75% in Q4; and conversely, 20% of our sales in Q2 came from the EMEA region, versus 8% (inaudible). Our products mix became more balanced, as well, due to the addition of the Wavecom products. In Q2, 50% of revenue came from AirCards, versus 77% in Q4; and embedded rose to 33% in Q2, from 16% in Q4.

We ended the quarter in a very strong cash position, with $131.5 million of cash and short-term investments. This balance is entirely unrestricted and is up nicely from unrestricted cash at the end of Q1 of $115.6 million. This increase in cash is driven by strong cash flow from operations of $18.5 million. Good focus on working capital management in the areas of receivables, payables, and inventory was a strong contributor to this cash flow. Receivables were reduced to $73 million, from $86.4 million at the end of Q1; and inventory decreased to $27.3 million, down from $39.9 million at the end of [Q1].

Moving on to guidance for the third quarter. We are providing Q3 guidance on a non-GAAP basis, which excludes Wavecom transaction and integration costs, restructuring costs, stock-based comp, acquisition amortization, and foreign exchange gains or losses on amounts related to the Wavecom acquisition.

Q3 revenue guidance is $135 million, flat from Q1, and is comprised of $101 million from Sierra and $34 million from Wavecom. Q3 non-GAAP earnings from operations is expected to be $2 million, comprised of $8.2 million from Sierra, partially offset by an expected $6.2 million loss from Wavecom. And non-GAAP net earnings of $2 million, or $0.06 per share, expected for the third quarter.

With that, I'll turn it back to Jason to sum up and provide an overview of the Wavecom [business.]

Thank you, Dave.

So to summarize, our Q2 earnings were better than expected, driven by a strong improvement in gross margin and tight cost management. Our cash flow from operations was strong, and our ending cash and equivalents balance is significantly ahead of expectations. Completed our acquisition of 100% of Wavecom less than five months after announcing the deal. We've also made very good progress on our integration.

We now have a much more diversified business with lower customer concentration, better revenue balance across products and regions. We are encouraged by our new OEM design wins, as we believe they highlight the customer appeal of the Sierra/Wavecom combination. We also believe that these wins, combined with planned new AirCard launches, have the potential to drive significant growth in the coming quarters.

We're also investing in important new areas of our combined business, with a focus on expanding our position in the value chain and creating a more profitable, more defensible enterprise over time. So while our short-term view continues to be affected by the macroeconomic situation, we believe that we are very well-positioned to capture growth when strength returns to the macro environment. We've got the right products, the right customers and channels, strong global capability, the right investments underway, and the right team in place.

With that, I'm going to shift gears and move to a bit of an overview of Wavecom and then roll into a discussion on expected synergies out of the combination. We're doing this quick overview of Wavecom to give you a better understanding of the company, core competencies, positioning, some of the segments that Wavecom competes in. And again, we'll try to move quickly, because we're conscious of the time and, again, this information will be available on our website following the call.

So starting with a quick profile on Wavecom. This is pre-acquisition, now. I think most of you know, a leading designer and developer of embedded solutions for M2M and automotive. About 500 employees and contractors worldwide, with about half of that in R&D. Very focused on software platform development, particularly protocol stacks, embedded operating systems, and development environments, and, more recently, a step into turnkey solution design.

Wavecom products are sold around the world through something like 40-plus distributors, and hundreds, literally hundreds, of OEMs around the world have incorporated Wavecom technology into their products. Like Sierra, Wavecom manufactures primarily with Flextronics in China in a facility in Suzhou, which is -- which also has automotive certification. The company has a strong presence around the world, including critical mass in Europe, North America, and Asia; particularly strong presence in Asia, with an office in Hong Kong and Beijing.

Probably not well-appreciated by the street is Wavecom's history of innovation and how that's resulted in a differentiated product position for the company. The company was the first company in the world to launch a fully prepackaged and prequalified embedded module for handsets in M2M applications, and has invested a tremendous amount of resources and capability in the development of intellectual property embedded software platforms. The company even went so far as to develop ASICs on its own, early on. And some of those ASIC designs were successful in manufacturing and actually got shipped in the millions of units.

The company's Open AT software suite really is a foundation of the company's differentiation, a suite of software that's complete with Wavecom's own GPRS and EDGE protocol stacks, embedded operating system, and fully integrated development environment to ease the implementation of M2M applications.

In 2006, the company continued its innovation track, releasing the wireless microprocessor, which is really a fully prepackaged application processor first, with development environment; and it also performs the functions of the wireless module. This is literally a solderdown component, much like you would solder down a processor component in a computer or other kind of design.

enSIM is another key innovation. Embedded -- the embedded SIM is now gaining a lot more traction in the market, as it's viewed as a less costly and much more reliable solution to the plastic SIM. And Wavecom's [inSIM] initiative was, clearly, market-leading and is first to market with that technology.

And then in 2008, took another big step in developing its end-to-end solutions capability with its acquisition of Anyware Technologies in Toulouse, France. And it's that team that is now the nucleus of the combined companies' software and solutions business line.

On to the range of products. I think we've already covered the hardware products sufficiently, but touching on the high points there. It's a broad range of products, ranging from highly programmable devices to very simple bit-pipe devices and also covering the two main technology streams, both GSM and CDMA. That's complemented by the Open AT software suite, which, as indicated, has a fully embedded software suite, including the operating system and protocol stack; value-added plug-ins that were developed that make it easy for customers to plug in market-leading applications directly into the environment; and also the integrated development environment, to speed integration and end solution into the market.

That's complemented by a services business, as well, much like CR Wireless, a strong position in providing professional services, certification support and the like. But in addition to that, providing a hosted intelligent devices services; and now, with the Anyware Technologies team, full end-to-end hosted solutions. So you can see, really in a position to cover the entire value chain from hardware, modules, subsystems, embedded technology, and hosted services.

So a couple sound bites with respect to market position. I think it's probably well-known that Wavecom has a strong share in providing modules to Tier-One automotive suppliers; and also a strong position in providing modules into M2M applications. Generally recognized as the number two in the business. I've touched on the innovation capability, which we believe puts Wavecom in a very strong position to provide a differentiated product and solutions offering. And now, bringing together all of the elements of a solution to provide full end-to-end solutions capability, and taking a much larger role in the value chain, driving higher revenue and better defensibility.

So with that quick profile, I'm going to turn now to some of the major markets that Wavecom is engaged in. I'm going to step through, really, just the top six markets, which accounted for approximately 90% of Wavecom's business in 2008. Walking through these slides really to give you a good indication of where their revenue is coming from and a better understanding of the typical applications, customers, and market dynamics.

The first one is automotive OEM. And in this segment, Wavecom sells modules direct to Tier-One automotive suppliers, who then sell subsystems directly to auto manufacturers. And these subsystems are incorporated directly into the automobile manufacturing process. This segment accounted for 13%, approximately, of Wavecom's 2008 revenue. Typical applications in this segment include crash safety, such as the European eCall initiative; telematics and remote diagnostics of the vehicle; stolen vehicle recovery; and to an increasing degree, higher bandwidth applications such as infotainment. And that's where we see a real fit for Sierra Wireless solutions plugging into now the Wavecom channels.

Some of the customers, you see some of the Tier-One suppliers there, including Denso, Magnetti Marelli, and Autoliv, as well as a number of top-tier automotive manufacturers. The blue rings indicate Wavecom customers. Where you see red, that customer is a Sierra Wireless customer. And you see a shared customer there in Magnetti Marelli, as well. And I think the Ford implementation with Magnetti Marelli is a good example of one of those high bandwidth applications. It's called the Crew Chief application for Ford F-150s, where Sierra Wireless modules are required in order to provide the required bandwidth to the vehicle.

Notwithstanding what's happening with automotive sales today, we think this is a market that has fundamentally good growth drivers, as we believe the demand for crash safety, telematics, and infotainment services is going to continue to grow. And we've got some interesting market drivers, including EU and Brazilian regulation, helping to push that market along.

My next market is the automotive aftermarket. And this is quite a very broad, broad segment, actually covering things like fleet applications, as well as consumer applications for stolen vehicle recovery, and insurance pay-as-you-drive applications. Additionally, it's got government applications in there, such as toll and tax collection. So quite broad. This market represented approximately 22% of Wavecom's 2008 revenue. See some of the applications listed on the left -- stolen vehicle tracking, fleet management; a number of the customers in the middle, including automotive solutions providers such as Meta Systems, tracking services like Tracker and Car Track, as well as fleet management solutions from providers such as Trimble and [Cal-Am].

Like the automotive market, we believe it's got fundamentally good growth drivers and growth prospects. And those drivers are coming from both business customers, who are trying to drive improved efficiency, as well as consumers for things like tracking their own personal assets.

The next segment is energy management. And this particular segment is becoming a key focus for the combined company, as well. We believe it touches a lot of areas of the combined business, including our mobile and M2M gateways business, and are busy putting together a full company strategy for attacking the energy management space. We're a big believer in this space. We think it has the right kind of macro drivers over time to drive some interesting opportunities. Energy management, in general, comprised approximately 16% of Wavecom's business in 2008. And again, quite broad, we see applications in electricity, gas, water. I think most of the publicity is focused on electricity and, in particular, smart metering and smart grid applications. We are, certainly, engaged in a number of those applications. But we also see opportunities in water, as well as renewable energy management such as solar power and wind.

Sample customers in the middle. You see a big sampling of some of the large meter manufacturers. We are designed into a number of the electronic meters, as well as into a number of the electronic meter concentrators. And in addition to that, we have end-to-end solutions deployed with solar management companies.

Fundamentally good growth drivers here. Again, I'm a big believer in this. I think, in major markets and developing markets, we're going to continue to have growing energy demand with little appetite to continue massive capital investment and the related environmental impact. And I think communications is going to play a key role in managing energy for the world.

The next market segment is payment, which is pretty concentrated on point of sale terminals, but also includes things like automatic telemachines and vending machines and even lottery machines. Kind of the theme in this segment is transaction -- secure transaction processing. Payment accounted for 11% of Wavecom's business in 2008. Typical applications, we've covered.

And I believe we're very well-positioned, particularly with the payment terminal players. Ingenico and VeriFone alone comprise approximately 70% of the market share for payment terminals, and we have design wins with both of those players. Again, a market that is poised for pretty good growth and has good fundamental growth drivers, including some help from various government agencies who are driving EFTPOS, in order to make sure they collect the proper amount of that.

The next market is security. Quite concentrated in the premise-marketing -- premise-monitoring applications, although expanding to include child- and pet-tracking, as well as surveillance and house arrest applications. Surveillance is one of those that's likely to require 3G capabilities. In 2008, security accounted for approximately 12% of Wavecom's revenue. You see some of the key players that we're engaged with there, including Honeywell, Numerex, Telular, etc. And again, I think, notwithstanding what's happening in the housing market now, some pretty good fundamental growth drivers, as these are fundamental applications and technologies that both businesses and consumers will need to take advantage of.

And then the final market I want to cover is industrial control and monitoring. This is a very broad, very diverse set of applications and segments. It's kind of the "everything else" category, if you will. Big focus here on industrial automation, mainly equipment monitoring; but also digital signage and even telemedicine applications for monitoring things like heart monitors. This accounted for 13% of Wavecom's 2008 revenue.

Again, this is a market we feel like we're quite well-positioned in. And with respect to two of the names that you see there, Schneider Electric and CBS Outdoor, not only are we a hardware supplier, but we're also an end-to-end solution provider. Again, good growth dynamics in this industry, mainly driven by the need for greater efficiency with respect to monitoring and controlling remote assets.

So I hope that provides you with a -- I know that was quick, but a better understanding of Wavecom and the markets they serve and the value that the Wavecom asset brings to Sierra Wireless. We're now going to move quickly to the combined company positioning and, as promised, a discussion on the synergies we expect to get from the Wavecom acquisition.

So first is really about products. And we're firm believers now the combined company is in a position to offer the broadest solution offering in the industry. And we believe that we're serving a number of the right markets that have good growth characteristics. So we're now in a position to provide 2G -- pardon me -- 3G/3.5G AirCards, a wide range of embedded solutions, intelligent gateway solutions, as well as end-to-end portal solutions and development environment solutions to a growing number of these key growth segments.

We also firmly believe that we've got a broader and deeper global footprint than any of our peers. We've got a highly diversified set of global channels and customer base. And we also have what virtually none of the other M2M players has, and that's global operator leverage, as well, which is key when it comes to certifying our customers' -- our OEM customers' end-to-end solutions and devices onto networks around the world, and to helping them with channels.

And there's a give-back, as well, to the global operator relationships, because we're seen as the player who continues to feed them with interesting solutions and devices to satisfy different market needs [below] their network.

With respect to presence and capability, together with Wavecom we've got R&D in Europe, North America, and in Asia, and our Asian R&D base is growing significantly. This matters to customers, particularly multinational customers who require global support. And that's complemented by a global technical support footprint that's located in virtually every region around the world.

And as we go around and talk to key channels, key customers, particularly those who do business around the world or who design their products in one region and deploy them in another, this is key capability to have. And we believe we're the best-positioned company with respect to global footprint.

So we're going to move now into a discussion of cost structure and synergies. And with that, I'm going to turn it over to Dave to cover the high points here.

Great. Thanks.

So with the acquisition of Wavecom, it resulted in an opportunity to reduce our product costs through a variety of synergy initiatives, including rationalization of operations overhead among the combined organizations, manufacturing facility rationalization, consolidation of logistics, better purchasing power, and, over time, platform design harmonization to maximize the use of common parts across the product portfolio.

We've already made some good progress in this area and have realized some early synergies. And we expect these initiatives to reduce our per unit cost of goods sold by between 3% and 4% between now and the end of 2010.

Looking at non-GAAP operating expenses. In Q4 2008, the quarter immediately preceding the acquisition of Wavecom, combined pro forma non-GAAP OpEx was $48.9 million. On the same basis in Q2, we just reported non-GAAP OpEx of $44.5 million. This reduction, primarily, reflects the impact of the independent cost reductions undertaken by each company to date. In addition to these initiatives, we've also begun to implement a number of synergy initiatives to further reduce OpEx, including headcount reduction and facilities rationalization, such as the closure of the -- of Wavecom's RTP North Carolina facility, which we announced back in May.

We expect these actions and others to further reduce our quarterly non-GAAP OpEx to approximately $40 million the first quarter of 2010. This level of OpEx represents approximately $36 million of annualized savings relative to the jump-off point in Q4 2008, with approximately 50% of these savings coming from synergies, the balance coming from independent cost initiatives across the organization.

We have implemented comprehensive headcount reductions. Over the course of 2009, we expect headcount in the Americas to be down by about 98 people, driven by both Sierra's downsizing earlier this year and the closure of the Wavecom RTP facility. We expect Europe to be down by about 85, driven by the restructurings in Wavecom, which we are just implementing now, as well as activity in the solutions and services business.

And going the other way, we expect Asia to -- resources in Asia to increase by about 80. Increase of resources in Asia is a key initiative in terms of building capacity in lower cost jurisdictions, while at the same time managing our resources carefully elsewhere.

With that, I'd like to sum up. With the acquisition of Wavecom, we've acquired a global leader in embedded M2M solutions. That gives us strong share in key segments. We've purchased a proven innovator with a differentiated product offering. Provides us an expanding position in the value chain with solutions and services, and a strong presence in Europe and Asia.

The combined company is a leader in wireless for mobile and M2M -- mobile computing and M2M, with both companies being proven innovators. We have the industry's broadest product line, covering all elements of the value chain; a superior global footprint, with volume and R&D scale, resulting in a diversified business which is well-positioned in key growth segments; and we also have a strong combined balance sheet.

And finally, with the combination, we expect to capture significant synergies in operating expense, product cost, and revenue. And we have actions underway to capture these synergies to drive profitable growth.

With that, Operator, that concludes our remarks, and we'd like to open it up for questions.

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. (Operator instructions)

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

Thanks very much.

Jason, you had mentioned last quarter that carrier promotions drove strong sell-through. But things seem to be -- have taken a bit of a pause in Q2 and it seems you're expecting a similar pause in Q3. I'm just wondering if you can -- if that's a fair assessment and if you could explain some of the dynamics in the adapter space that are going on right now.

Well, I think it's a bit mixed, Mike, to be candid. We've got some operators who are experiencing ramping sell-through, and others who are not. And they seem to balance out a bit. Dave referred to one customer, in particular, who was taking a new product of ours. And the positioning of that product is at a -- as a premium position product, and price was not -- pricing was not exactly in line with aggressive promotion. And that missed our expectations.

We think, in that particular case, that's likely to turn around in the coming months. But it was really kind of mixed. We saw guys continue to grow, and we saw guys whose sell-through fell off a bit.

Is there a catalyst coming in the adapter business in the back half of '09?

Well, for us, our catalysts would be new product launches. And we're not planning on a big new product launch quarter in Q3, although Q4 is probably going to be a stronger one for us.

Q4. Okay. And --

And as you know, generally, new product launches are pretty key to driving growth.

And then on the M2M operating portal, is this similar to what Jasper Wireless is doing, and how might it compare?

It's a little -- there is some overlap, but it's a little bit different. So Jasper is coming at it from mainly the MVNO standpoint. So clearly, things like subscription management, they have. They also have a fully implemented billing system, which is something we don't have. But they lack a integrated development environment, which is something that we do have.

So if I were to compare the two, Mike, I'd say we're focused more on the software-as-a-service model. They're focused more on the MVNO model. But we each have some -- a bit of overlap there. And we've collaborated with Jasper in a number of sales situations, because in many ways we are complementary.

Okay. Thanks, Jason.

Sure.

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

Yes. Good afternoon. Jason, you've had Wavecom now for coming up on six months. Can you just quantify for us the percentage you think you're through the integration process?

About 50%.

And that seems consistent with the OpEx numbers that Dave referred to.

And Dave, just a question on amortization. The amortization of intellectual property from Wavecom, does that show up in your amortization line, or is that built into the R&D line?

It shows up in a couple of places. One is in R&D, and also in amortization. So it's split.

And how much of the $22.9 million in R&D might have been amortization-related?

So the total amortization -- purchase price amortization was $8.1 million, I believe.

Got it. Thanks and good luck.

Your next question comes from Al Grozovska from Morgan Joseph. Please go ahead.

It's Ilya Grozovsky, actually.

Guys, can you just take me through a little bit -- I'm having a tough time understanding. So the current quarter, the Wavecom piece was a loss of $6.9 million in operating earnings from operations. And that's getting a little bit better in the second quarter -- in the next quarter you have it at loss of $6.2 million. But the Sierra business is going from $9.7 million gain down to $8.2 million. What's causing that? Because it sounds like the gross margins are good, there's synergies that you're wringing there. And also on the operating expense side, it sounds like there's more to come out there. So is it just left pocket/right pocket, or what's happening (inaudible - technical difficulty)?

Jason Cohenour. It's really in-quarter specific items. And it's mainly in OpEx. While the macro trajectory on OpEx is going lower, as Dave presented, within Q3 we have a couple of things, such as certification and some third-party costs, that we anticipate will hit us in the third quarter and probably not in the fourth quarter. So they're really quarter-specific things on the Sierra side, mainly in OpEx.

So the OpEx in the third quarter should trend up a little bit?

On the Sierra side.

On the Sierra side. Okay. Got it. Okay. Thank you.

You're welcome.

Just a correction, Barry. The PPA number was $6.1 million, not $8.1 million. Sorry about that.

Your next question comes from Chris Umiastowski from TD Newcrest. Please go ahead.

Hi. Thanks so much, guys.

Yes, Dave, I was just going to ask you about that. Your press release says -- I think it says $6.2 million. But you're saying it's $6.1 million?

Right.

Okay. Now, can you just explain the breakdown? So $5 million shows up on the amortization line in your income statement. And $6.2 million is the total. So there's another $1.2 million buried in R&D, and anywhere else?

Yes. It gets spread out. For instance, there's a little bit to do with amortizing customers, for instance. So it is spread out. But the two largest buckets are in R&D and amortization itself.

Okay. And is that something that for the next little while we can expect to be pretty consistent?

Well, we -- we're just working through the valuation, purchase price valuation, right now, and what part to allocate to intangibles versus goodwill and hard assets. So that work will be concluded in Q3 or Q4. So right now, it's an estimate, to be firmed up when we finish that study.

Okay. No problem. We'll just adjust as we go along.

Can you guys touch on the announcement that came out of Verizon and QualComm yesterday, and maybe provide your thoughts on what they're doing, how it could be either competitive or helpful to you? It sounds almost like they're creating an M2M MVNO.

Yes. I think -- I'll comment on that, Chris. I mean, it's our -- we didn't have perfect visibility into the announcement. And one of our guys did listen in on the conference call. But at a high level, I think that, number one, I take it as a good sign. It's a -- exactly what we anticipated and, I think, had messaged that M2M, in many ways, is the next frontier for wireless operators as they seek out what's next in terms of driving new subscriber adds and the like. And so I think that's a good news macro trend.

With respect to how we view it and whether or not it's competitive to us, I think, number one, I'd look at it as an opportunity. Because, clearly, they are going to, as part of that initiative, require solutions, require devices. And my expectation is there's going to be spots there that we can -- soft spots there that we can address.

And thirdly, I think, yes, there probably is some overlap in what QualComm -- the old QWBS -- is offering and what our solutions and services business will offer. I think on balance I'd take it as a positive, because it's a good indication of the market direction. And I think it will provide us with significant opportunities, notwithstanding the -- a little bit of overlap in the market, as well.

Okay. I was hoping, also, to get a little bit of added color from your perspective on how the QualComm side of the business might be competitive. Because I think they do play in the M2M in the transportation industry, not quite directly automotive. But do you see that as a particular area of potential overlap?

There's definitely overlap, just as there has been historically. Right.

Yes. Okay.

We don't actually encounter them a lot. They do tend to be a bit more long haul trucking-focused; and then, for whatever reason, that's an area that Wavecom and Sierra have not been very focused on.

Okay. Next, sort of for Dave also, just wanted to clarify. I thought you may have mentioned the number 96% of your M2M revenue coming -- or your embedded revenue coming from M2M, and I wanted to make sure I understood that. Does that mean your PC OEM revenue is negligible in the quarter?

That's what that means. Yes.

Yes.

Okay. So I did interpret that number right. All right. Okay. That's just -- that's good to clarify. Where do you see that going? You said you had two Gobi wins. I don't think those are launched yet. Right? And then you've won two more, to bring the total to four. So what kind of volume are you expecting over the next few quarters in terms of PC OEM?

Well, I think we'll start to -- we'll probably see a modest, very modest contribution in Q3, and a bigger one in Q4, and, hopefully, a significant ramp beyond that. But these are -- we're excited by them. They're Tier-Two guys, but we've got multiple design wins within each of these companies. And you know how it goes. We've got to see how successful their platforms are in the market. And I think it's going to ramp to significant volume. I'm not sure that it's going to get us back to the Q2 highs -- Q2 '08 highs. But it's certainly better than the trajectory we've been on with PC OEM.

Okay. That's helpful. So no -- yes. I hope that goes well for you guys. That's definitely sensible, I think, to approach the Tier-Two market.

And lastly, let me -- and I'll pass it along after this one. Can you just give me some thoughts on your tax rate for next year?

Sure. I think historically when we've been profitable, we've been running in the low to mid-20 rate, Chris. So depending on when you forecast return to net profitability, that would be a reasonable rate to [use].

Okay. Perfect. Thanks very much for the answers, and I'll pass it along.

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

Thank you very much. And good afternoon, Jason and Dave.

Hi, Amir.

Hi, Amir.

Jason, you had mentioned that sort of new product launches in your adapter business is really going to be a sort of Q4 event. From our thought process, should we think about that as a current channel expansion event or just sort of either growing your carrying base or, perhaps, just selling into the current installed base? I mean, is there opportunity to sort of gain share at other carriers where you may not have as strong a position right now?

I think there is. I think there is. I think that the wins I'm referring to are primarily with existing channels and a potential to grow our business within those existing channels. But I think we also have opportunities to break into new channels. And we're working hard to do that. I think we've got the right products and the right functionality and the right price. But we still have business development execution ahead of us, to get there. But we're encouraged, and we see some real opportunities. So stay tuned.

Will do. Will do. And if we think about sort of in the past, I mean, there's been different sort of drivers for upgrades. Obviously, speed; design has been another; and sort of cost savings has been another. If we were to look at those three buckets and think about the new products, I mean, where are you focusing on? Is it all across the board or is it one specific area you'll probably -- you'll lean on more than the others?

Well, I think for the coming launches, Amir, the ones that are close at hand, there's going to be a focus on form factor and functionality, rather than airlink speed. And in other technology streams, a focus on cost reduction. And then with respect to kind of breakout new airlink speeds, of course, we're first in market with HSPA+, so we're trying to -- we're driving that pretty hard. We do now have some renewed interest in Europe from operators who are going to deploy HSPA+. So I think we're in a good position to take some of those speeds -- take some of those slots.

And then looking farther down the road, of course, it's going to be all about LTE. But that's not until 2010.

Okay. And that's when we should expect LTE-based devices --

Yes.

-- from you folks. Okay. And then shifting to the acquisition or the integration. I mean, certainly, it seems as though you have a lot of opportunities for cost synergies, both in terms of sales synergies and in terms of cost synergies. Given the diversity of the different end markets that you're going to be addressing, how should we think about sort of trajectory of growth for that business? I mean, you've got a lot of carriers making announcements that are supporting the M2M initiative. Have you solidified sort of where you think sort of an optimized growth rate would be for that type of market?

Well, we presented -- I just walked through all of the segments. Right?

Right.

I don't know if you were on the webcast or on the phone. But all of the segments that we're currently engaged in or that Wavecom is currently engaged in on the M2M side -- ABI has projected -- bought 20% to 30% --

Yes. 20% to 30% [as a range.]

-- compounded annual growth. Now, that's, candidly, overshadowed by the general macroeconomic situation.

Sure.

But I think once the -- once strength returns to the macro environment, those should be very good growth segments. They've got everything that you would want to see in a growth segment. Right? I mean, the technology is now in place; the applications are falling into place; there's a compelling business reason; et cetera. So I think we're well-positioned for when the market does kick into gear and, beyond this current macro-malaise, I would be counting on 25% compounded annual growth in those machine-to-machine segments.

Great. That's very helpful. Thanks a lot for the incremental color.

Sure.

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

Hi. Good afternoon, guys.

Hi, Dev.

Hi, Dev.

Hi. Jason, I've got two or three questions. So just in terms of the Q3 guidance, do you see the flattish kind of profile Q2 to Q3, is that totally based on economic slowdown or is that the fact that some kind of a function [of the science] of the technology evolution into HSPA+ has kind of plateaued, so to speak, and unless we are [onto a] new kind of ADS of technology growth, a new technology is coming in, that is not going to get rejuvenated to the kind of 2007, early 2008 levels?

Yes. Well, my read is it is macroeconomic-related. We're just not seeing the strength in the sell-through growth. And as I indicated earlier, we saw some guys slow down a bit in sell-through. We saw others grow a little bit. But on balance, it's been stable.

So technology transition -- is a lack of technology transition kind of holding things back? Well, I think there's opportunity for technology transition, so I wouldn't throw that out the door. Right? I mean, HSPA+ is still an opportunity. Combo WiMAX Rev A is still an opportunity. And a little bit farther out, LTE is. So I don't think there's a major slowdown in the technology progression. And in my view, there is just -- people are cautious. Right? Operators are cautious with respect to inventory management. And I think end customers are cautious with respect to what they're buying.

Okay. And one final one. I do have a question regarding that. With respect to AT&T, would you be free to tell us whether you lost -- not -- lost would not be the right word -- but you are sharing this particular customer, after long, long time having a monopoly, with another competitor. Has the comparative share of that particular customer increased, given Q2 versus Q3 -- or, sorry -- Q1 versus Q2?

I don't think so.

Okay.

I don't think so.

Okay. Thanks. And then, I guess, (inaudible - highly accented language) question today (inaudible) either of you. In terms of the margins, I mean, the margin was a huge surprise, at least for me, in terms of an upside. Now, is that 33%, 34% profile going to be going forward, or is that going to be even better? Because I can see that $40 million in terms of the target per quarter for the quarterly OpEx run rate. But given Dave's comment earlier, as well as some of the published comments in terms of 3% to 4% reduction further in terms of cost, if you take 30% as gross margin, that means 70% is COGS; 3% to 4% of 70% is about 2.8%. So are we looking at additional 2% to 3% increase, or the 33%, 34% kind of run rate there in 2010, as you [walk] into a new year?

Dev, I'd be careful to overheat that. We've certainly got -- we certainly have visibility on reductions like I spoke about. But obviously, it's a competitive environment out there, as well. So ASPs become a factor, as well. So I would be hesitant to heat it up like you're suggesting.

But Dave, 33%, 34% should be [not a one-quarter] phenomenon. I guess that should be the baseline that you will be targeting, and successfully so, going forward. Right?

That's certainly what we're going to be targeting, Dev. I'd just -- I'd be careful not to set the expectations beyond that. And we think we've got our hands on the levers and dials to keep it in that range. But as Dave said, it's a competitive business. Right? We need to be careful.

Okay. And one last question and then I'll just stand back in the queue. In terms of new customer shipments and new products -- and I know that the (inaudible) substantial on the Asia-Pacific side ,whether it's (inaudible) or some other carriers in Japan. Can you give us some kind of color in terms of what major customer shipments we can expect as we go into Q4 and then Q1 2010?

Major customer shipments? Well, I think Denso is a key milestone for us. Right? So that's a -- for a specific, Denso, car manufacturer customer. That was effectively launched in Q2. And so we've got expectations that that will continue to grow. We have the two new consumer electronics wins that we're encouraged by. Those, we would believe, will be United States launches and could drive significant volume this year in the second half, more likely Q4. And we're also encouraged by the Gobi design wins, as well.

So I think we've got some pretty good things moving with respect to the new design wins. By the way, we believe, in the top part of 2010, we should begin shipping on one of the European automotive deals that we've won, as well. So I think all that's positive. And now we need to execute with the customer on full integration. And then, of course, the customer's got to execute in the marketplace. They've got to go sell some of this stuff, so --

Okay. So just a clarification on that last question. So you do expect the North American share of your overall revenue, which stands right now at about half, as opposed to the traditional 75% or thereabouts to fall further as you move into --

(Inaudible - multiple speakers) geographical mix. I think we messaged previously -- not in this call, but in calls in the past that we'd really like to get the mix to a 60/40 mix. And well, we're there. We've already beat it. Right? So Q2, we had 59% in the Americas. So where's it going to go? Will it trend to 50%? I don't know. We're pretty happy with the 60/40 mix right now.

Probably, given the design wins we have -- the design wins seem to be pretty well balanced from a geographical standpoint. So we'll see. It might go to 55/45, maybe. But I think we're pretty close to the -- we're pretty close, I think, to the mix you should expect going forward.

Okay. Thanks for taking my questions, Jason and Dave and (inaudible).

Your next question comes from Paul Costner from JPMorgan. Please go ahead.

Yes. Thank you. I wonder if you might, Dave, give us some sense of how the R&D dollars are being allocated. I assume that it's sort of focused on growth and margin opportunities. But given the proportion of the business that's in the AirCards, I'm just wondering how that breaks out.

Well, we're still -- we continue to heavily invest in the roadmap across all of the product categories, frankly, Paul. So we've got development activity on AirCards, embedded, in gateways, and also on the solutions side. So it's investing in all of those segments.

It's approximately proportionate to revenue or is that --

No. I wouldn't say that. Because if you look at things like the solutions and services business, which has very low revenue and a considerable R&D investment, clearly, those two things aren't aligned with respect to the solutions and services business. So we do view that as an investment line of business. And I would say there's probably a little bit more incremental investment in embedded, in general. I think that shows, of course, in the Wavecom results. Right?

Yes. That makes sense. Have you stated a long-term business model from an operating margin perspective? If not, do you care to do so?

Yes. Operating margin on a non-GAAP basis, we would target in the 10% to 12% range, Paul.

Great. Thank you. And then the last question -- I think you've already answered this in part, Jason -- is, of the markets that Wavecom is addressing, which of them do you feel is the most -- in the closest proximity to growth and recovery from the slowdown?

Well, that's a bit of a tough question. If I -- I would say that, probably, premise monitoring would not be high on that list, just because it's so closely connected with new home sales. Automotive, for us, I think, actually, notwithstanding the shape that the automotive industry is in, I think, for us, it's a growth story. And that's -- but that's mainly because we've got design wins that we're starting to ship on.

So for our business, we see automotive as a real growth opportunity in the -- well, in the current quarter and the coming quarters, as well. I think that from a macro movement standpoint, the one that we are focused on as a company is energy management. And I think as I commented earlier in the call, we're going to have a energy management -- corporate-wide energy management strategy, not just for embedded, but across all lines of business. I think that we've got -- we've already got a significant position there. And I think the macro drivers for that market are just going to get more favorable for us.

Okay. Thank you very much.

Sure.

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

Hi. Good evening, guys. Can you provide the Wavecom breakout between the embedded and the gateway for last quarter?

For Q1, Sera?

Yes, please.

Do you have that handy, Dave?

Just give me a second, Sera, if you want to ask another question.

Okay. No problem. So just referring back to the earlier gross margin questions, so how should we think about gross margins in relation to ASP declines and then the product cost reductions that you're implementing? So do you think the Q2 gross margins are sustainable, or should we -- how should we balance those two?

I think -- are they sustainable? Well, I think we're, certainly, surprised at the upside on gross margin in Q2. We've got things moving in different directions. We've got pressure on ASP, and I think we've got some good actions underway on product cost reduction. So I would say in the -- gross margins in the low to mid-30s is the range we're certainly going to be targeting and the range we want to keep the business in. So might things happen related to mix on any given quarter that drives that a little higher or a little lower? Yes. But I'd be thinking about low to mid-30s.

Okay. Great. And it looks like you have some more competition in the volume slots at your top two customers. Can you just talk about what you guys are doing to insure that you can retain that top -- the volume slot for future products?

Yes. We're doing what we always have been. In fact, I'm very comfortable with our share at our top two customers. So -- and we're not getting lazy on that. I'm just very comfortable with where we're positioned in those channels. And with respect to one of our top three customers, I think our position has just improved significantly with respect to going-forward volume.

So I think -- so what are we doing? Well, we are seriously investing in our top three operator customers on an R&D basis, on a go-to-market basis, on a retail support basis. And we're going to continue to do that. So it's up to us to respond to their requirements. And that -- and candidly, they're what -- they're the customers that drive our AirCard R&D activities, and they're what drives our -- they are what drives our retail support activities.

And in addition to that, we need to invest in new innovations in bringing additional solutions to help drive activations and ARPU on their network. And I think, candidly, our growing position in end-to-end solutions and in machine-to-machine is very attractive to our big AirCard customers, too.

Okay. Dave, do you have the answer to the question, or should I ask another one?

So in Q1, the Wavecom contribution to the gateways segment was 0.9.

Okay.

Only one month --

Right.

-- Sara. It was only one month.

Yes. I know. It's just -- just for comparative. And just a last question -- Jason, earlier, you mentioned -- when you were talking about the different businesses, the solution services, it's something that you guys are looking to grow. What type of revenues would you like to -- would you expect from this as you get this up and running? And how much -- would it be all recurring revenues, or what's the -- ?

This is a recurring revenue model.

Okay.

And I'm not going to forecast it right now. It's an investment business. And we're serious about growing it. I think we've got some good design wins that'll continue to drive the revenue up. But it's too early to start messaging on what that could be.

I will say we're certainly receptive to not only growing that business organically, but through adding -- driving scale through acquisition, as well.

Okay. Great. Thanks a lot, guys.

And in addition to that, we'd expect it to pull through some hardware sales, as well.

Right.

Sera Kim. Okay. Great. Thank you.

Sure.

Operator, we'll take one more question.

Your last question comes from [Nikael Tadani] from Raymond James. Please go ahead. Mr. Tadani, are you there?

Sorry. Just getting off mute. Thanks for taking my question.

I was just wondering on the OpEx cut sides, were you expecting to sort of make any more cuts there going forward in the second half of '09, or do you see most of that potential already reached?

We've just gone through a fairly major restructuring. So I think we'll see things being a bit stable here for a period of time.

And as far as the charges go, is that mostly done, as well, or do you see any more follow-on charges coming in Q3?

We will continue to have some charges. Remember, the people that are being terminated are coming out over time between now and the end of the year, so there are some additional costs associated with those people. And then we expect to have some further synergy-driven provisions around things like facilities rationalization, for instance.

Okay. Great. And just one last quick housekeeping question. I was just wondering if you could break out the M2M gateway for Wavecom for Q2. I think I missed that earlier. For Q2, not Q1.

For Q2, it would be approximately 2.4 .

2.4. Great. Thank you.

You're welcome.

Mr. Cohenour, please continue.

Yes. And with that, we'll end the call. Thank you very much for listening in. I know it was a long call. Thank you for the questions. And as usual, management is available here at our headquarters in Richmond for follow-on questions.

Ladies and gentlemen, please -- ladies and gentlemen, this concludes the conference call for today. Thank you. You may disconnect your lines.