司亞樂 (SWIR) 2009 Q3 法說會逐字稿

Thank you for holding for the Sierra Wireless Third Quarter Results Conference Call. I'd like to introduce your speakers, Jason Cohenourand Dave McLennan. Mr. Cohenour, you may begin.

Thank you, Sean. And good afternoon, everyone. Thank you for joining today's call and webcast. With me on the call today is Dave McLennan, the Company's CFO. And the material that we're going to present today, as well as the replay, will be available following the call on the Company's website.

A reminder that the contents of today's webcast and call is subject to the Company's Safe Harbor statement. We're not going to read the Safe Harbor statement into the record today. It is currently being displayed on the webcast on slide number two. I'll pause so you can read that.

The agenda for today's call is as follows; I'm going to run through a business update as well as an update on the Wavecom integration. I'll pass the call over to Dave who will cover our Q3 financial performance as well as Q4 financial guidance. I'll then provide some summary comments and we'll go to questions and answers.

Starting with a quick business review on slide five, in the third quarter of 2009, we experience solid revenue of $135.7 million despite significant flash memory supply constraints that impaired our ability to meet customer demand for several products.

We delivered strong gross margin of 34.8%. We made good progress in reducing our fixed cost structure as we experienced the initial benefits of our cost synergy efforts with Wavecom. Our solid revenue, strong GM, and good cost reductions combined to drive better than expected non-GAAP earnings from operations of $5.1 million. We also achieved strong cash flow from operations of $15.1 million and ended the quarter with nearly $136 million in cash and equivalents.

Based on the strength of our larger global platform and embedded solutions, we secured important new design wins in consumer electronics, mobile computing, and M2M. We made strong progress in our product development efforts, introducing and launching several new products in our AirCard embedded module and AirLink Gateway lines of business. We captured strong momentum in our strategic efforts to establish the Company as a leading provider of end to end solutions, announcing new managed services, customer wins, and organizational changes designed to help us hone our focus in this key area of our business.

We continue to make strong progress on our integration efforts with Wavecom, implementing our site rationalization plans and putting in place important infrastructure elements required to support our global business. Our integration is going well and is on track. We believe we are well on our way to creating a global leader in wireless solutions for mobile computing and end to end.

Moving to our product line updates, I'll start with our AirCard product family which includes our PC Card, ExpressCard, and USB devices. Our Q3 AirCard sales were $78.5 million, up 1% sequentially and down 20% 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 continue to be key drivers in Q3 and we believe our channel position with these operators continues to be strong. We also experienced significant Q3 contribution from TELUS in Canada, Telefonica O2 in Spain, UK, and Ireland, as well as from SoftBank in Japan.

During Q3, we introduced our second generation HSPA+ AirCards, just as some of our competitors are just introducing their first products for HSPA+. We also introduced a new feature in cost optimized AirCards for legacy HSPA networks, designed specifically for consumer and prepaid channel opportunities. We expect all five of these new AirCards to begin shipping in the current quarter.

Following significant development and extensive Microsoft testing, several of our AirCard products also secured Windows 7 mobile broadband certification. With this compatibility, our AirCards will automatically be recognized by Windows 7 mobile broadband drivers and connection manager software upon insertion. We believe this will streamline the installation and use of our devices with Windows platforms.

Finally, we made strong progress on the development of a highly differentiated device in the personal hotspot segment. We secured a channel slot for this product with a major operator and the device is currently undergoing operator certification testing. We expect the device to launch in early 2010.

Moving to our embedded solutions product line, in Q3 revenue from our embedded solutions was $44.6 million, flat from Q2 and up 50% from Q3 of 2008. Wavecom contributed $29 million in embedded module revenue in Q3 and while Q3 overall was up sequentially, we were unable to fulfill some of our customer orders due to supply constraints on flash memory which effected several of our legacy Wavecom products. We expect these supply constraints to continue through Q4.

With Wavecom, we now have the broadest embedded module lineup in the industry, covering 2G to 3.5G, CDMA and GSM, connectorized, soldered down, and specialized solutions for specific segments such as automotive. Our lineup also includes a rich suite of software from protocol stacks. It's a real-time operating system to host drivers, integrated development environments, traffic management software, and user interface software. In addition, we have a global professional service capability and a proven hosted device management service.

We now have many weapons to leverage in continuing to drive our leadership position in this space. Our products in global channels have enabled us to establish a highly diversified channel and customer base, covering many regions and growth segments. During the quarter we continued to secure design wins in key segments including consumer electronics, payment, security, and mobile computing. We believe that some of our design wins represent share gains from incumbent competitors.

We're also able to confirm on today's call that one of our modules is inside the recently introduced Barnes and Noble nook e-book reader, an innovative new entrant in this rapidly growing segment. Two of our OEM partners, Outpost Central and Radiocraft's AS also introduced new smart metering solutions based on our Fastrack Supreme platform. Both of these partners highlight well our continued commitment to supporting innovative solutiosn for the energy management segment.

Overall, sales to M2M and automotive segments drove 96% of our embedded solution revenue in Q3 and while PC OEM was a small contributor in Q3, we were awarded additional GOBI design wins with notebook and netbook manufactures, bringing our total number of GOBI wins to eight. We made our first GOBI shipments in Q3 and we expect revenue contribution from the mobile computing segment to grow in the coming quarters as a result of these design wins.

Moving to mobile end to end gateways, Q3 AirLink intelligent gateway sales were $10.3 million, up 1% from Q2 and up 42% from Q3 of 2008. Wavecom contributed $2.8 million in gateway sales during the quarter. This line of business continued to contribute strong gross margin of over 50% and strong operating margin as well.

North America was once again a key driver for gateway sales although we're investing significantly to expand our sales in EMEA, Asia, and Latin America. During the quarter, several of our new gateway products received network approvals from leading operators in North America and were subsequently launched. We also introduced our new web based hosted device management service called ACEnet.

ACEnet is tightly integrated with our AirLink gateways and the ALEOS embedded firmware which resides within. ACEnet allows customers to remotely monitor, configure, and manage their AirLink gateways from a secure hosted web portal. ACEnet dovetails nicely with our global M2M operating portal platform residing in our solutions and services business unit. In the coming months, ACEnet will be integrated with our global M2M operating portal and become part of our comprehensive suite of hosted services and solutions for M2M.

A continuing area of focus with our integration is to drive leverage between our gateways and solutions and services businesses. To that end, AirLink and our solutions and services teams have been actively engaged in integrating our gateway products with our new M2M operating portal and are making good progress. Our teams have already collaborated on a number of public demonstrations and customer proposals.

Also during the quarter we signed an MOU with T-Mobile covering a wide range of product development, sales and marketing collaboration activities in the M2M market. We expect our AirLink gateways and other Sierra products to feature prominently in this initiative which is initially focused on the German market. We're in discussions with several other global operators regarding similar collaboration arrangements. We believe that we are seeing the beginning of a potentially exciting trend as more and more operators are putting their strategic efforts behind machine to machine.

Moving to solutions and services, our newly acquired solutions and services business was a small contributor to overall revenue in Q3 but we are very focused on growing this business into a key revenue and profit contributor over time. Based in Talus, France this business while small has a collection of very compelling software and services technology assets which are in place, operational and proven in live customer environments. Our intention is to sell our portal services, tools, and applications, on a software and service basis to operators, OEMs, integrators, and selectively to large enterprise accounts. These efforts are well underway and will expand over time.

During Q3, we delivered several proof points that underscore our commitment to building this business as well as the strength of our position. Late in the quarter, we took the action to reorganize and integrate Anywhere Technologies, the software and services company that Wavecom acquired in 2008. These changes included spinning off Anywhere's open source consulting business to a group of employees and integrating the remaining team members into Sierra Wireless and forming our solutions and services business unit. We believe these changes will help us to hone our focus on delivering end to end solutions for the M2M market and to drive collaboration with our other lines of business.

Following many meetings with perspective customers, it's clear to us that operators, OEMs, and integrators find our solutions, services, and capabilities compelling. We now have formal engagements with a number of customers including PSA Peugeot who will use our platform for device management and software delivery and Orbcomm who will use our platform to enable remote device management and subscription management across celestial and terrestrial wireless networks. We expect to continue to add more prominent names to our customer list in the coming months.

To accommodate our expected growth, we're also investing in business development activities, R&D, and in expanding our hosting footprint globally so that we can support the needs of our customers around the world.

On to an update on our integration with Wavecom. We believe that our integration with Wavecom is going well and is on track. As a result of implementing our cost synergy plans, we experienced a significant reduction in our fixed costs in Q3 compared to Q2 and believe that our operating cost trajectory is in line with our plans and expectations. We also believe that we're experiencing the benefits of early stage product cost synergies which are helping us to deliver strong gross margin in a very price sensitive market. We believe that our product cost synergies will continue to improve over time.

We've made strong progress on our site rationalization plans and team integration. We're on track to close down our RTP facility at the end of this week in line with our previously stated plan. We've consolidated our office space in Paris, moving all employees to a single floor, helping us to reduce our ongoing rent expense while also creating a more dynamic collaborative environment. Our new org structure has been fully deployed and is working well. We've also completed the relocation of key people and programs, enabling us to maintain program continuity and to drive cultural cross pollination.

We've also selected and deployed important new infrastructure elements necessary to efficiently support our global team and business. We've selected our go forward ERP system and the integration project is well underway. We've upgraded our global WAN, integrated key systems, and deployed high definition video conferencing in several of our offices. These infrastructure investments are obviously necessarily to enable and efficiently operate in global business, but they're also going to help facilitate our growth. Our global sales and marketing collaboration also continues to be strong and I believe we're effectively leveraging our expanded global platform and capabilities to secure new design wins and to capture growing share.

With that, I'll turn the presentation over to Dave for Q3 financial results.

Thanks, Jason. Good afternoon, everyone. On to our Q3 results.

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 Wavecom transaction costs, restructuring costs, integration costs, purchase price amortization, acquisition related FX gains and losses, and stock based compensation.

Our results for Q3 are as follows. GAAP revenue was $135.7 million and there are no adjustments to revenue for the non-GAAP measure. This is in line with our expectations for the quarter. GAAP gross margin was 34.8% and on a non-GAAP basis, gross margin was 34.9% after adjusting out stock compensation of $144,000. Like Q2, Q3 represents another strong quarter of gross margin performance from our legacy Sierra business and the positive effect of blending in higher gross margin from the Wavecom products.

Moving to operating expenses, GAAP operating expenses were $57.4 million in Q3 and on a non-GAAP basis, OpEx was $42.3 million. Non-GAAP OpEx excludes $6.2 million of purchase price amortization, $200,000 of a write down of lease holds, $5.3 million of restructuring expenses made up of $1.6 million of severance costs and a $3.7 million provision for vacant office space in our Paris office which we are attempting to sublet. It also excludes $1.3 million of integration costs, $400,000 of transaction costs and a total of $1.7 million for stock compensation. We're very pleased with the progress we're making with cost reductions. Q3 non-GAAP operating expenses decreased by $2.2 million compared to Q2.

Moving on to operating income, GAAP loss from operations was $10.2 million and on a non-GAAP basis, earnings from operations was $5.1 million after the adjustments noted above. This is well ahead of our guidance of $2 million. The combined effect of strong gross margins and OpEx reductions resulted in Q3 non-GAAP earnings from operations increasing by $2.3 million compared to Q2.

On a net basis, our GAAP net loss was $7.6 million of $0.06 per share and on a non-GAAP basis, our net earnings were $5.9 million or $0.19 per share. In addition to the adjustments to earnings from operations, non-GAAP net earnings includes $1.5 million FX gain on inter-Company balances between the parent and the acquisition Company and $200,000 of tax related to the non-GAAP adjustments. So, that's the walkthrough of our GAAP results to non-GAAP results.

Looking at our Q3 non-GAAP segmented results compared to guidance, for legacy Sierra, revenue at $102.6 million was modestly above guidance of $101 million. Gross margin continued to be strong at 32.4% and earnings from operations at $9.5 million was better than our guidance of $8.2 million and represented a 9.2% operating margin from the legacy Sierra Wireless business.

For legacy Wavecom, revenue at $33.1 million was modestly below guidance of $34 million. Gross margin continued to be strong at 42.9%. Loss from operations was $4.4 million, considerably better than guidance of a loss of $6.2 million and better than our loss of $6.9 million in Q2. Accommodation of stronger than expected gross margin and good performance on OpEx reduction drove the better than expected results on Wavecom.

During Q3 we continued to see the diversification benefits of the Wavecom acquisition on customer concentration, geographic distribution, and product mix. During Q3, our two largest customers were Sprint and AT&T. Combined, they contributed 43% 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 brought our geographic distribution and have become less North American centric. In the third quarter, 61% of our sales were from the Americas, compared to 75% in Q4. Similarly, our product mix became more balanced as well, due to the addition of Wavecom. In Q3, 58% of revenue came from AirCards versus 77% in Q4 and embedded rose to 33% in Q3 from 16% in Q4.

Our financial capacity remains very strong. We entered the quarter in a very strong cash position with $135.9 million of cash and short-term investments. This balance is entirely unrestricted and is up from cash at the end of Q2, $131.5 million. And the Company is debt free. We also had strong cash flow from operations of $15.1 million in Q3.

We are providing Q4 guidance on a non-GAAP basis which excludes Wavecom transaction and integration costs, restructuring costs, stock based compensation expense, acquisition amortization, and foreign exchange gains or losses on amounts related to the Wavecom acquisition. This guidance reflects the uncertain macroeconomic environment. It also includes revenue contribution from expected new product launches and is constrained by expected component supply shortages on certain products.

Our Q4 revenue is expected to be $143 million, that's up 5.4% sequentially from Q3 and is comprised of an estimated $107 million contribution from Sierra and $36 million contribution from Wavecom. We expect Q4 non-GAAP earnings from operations to be $6 million, up 18% from Q3 and comprised of approximately $9 million from Sierra, partially offset by an expected $3 million loss from Wavecom. And on a net basis, non-GAAP net earnings are expected to be $5.2 million or $0.17 per share.

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

Thank you, Dave. To summarize, our Q3 results and Q4 guidance, we delivered better than expected non-GAAP earnings from operations in Q3, driven by continued strong gross margin and good progress on cost reductions. We delivered strong cash flow from operations and further bolstered our cash position, even while investing heavily in our integration of Wavecom.

Our bookings in the quarter were strong, giving us good visibility to Q4 revenue. We once again experience the diversification benefits of the Wavecom acquisition with lower customer concentration and an improved geographical and product mix balance than we've seen historically. We also continued to execute well in product development and launch. We certified and launched several new products in Q3 and we have a full pipeline of planned product launched for Q4 and Q1.

Our solutions and services business is taking shape. We're investing in development, sales, and infrastructure. We're integrating our solutions and services technology across other lines of business and we're securing customer wins and anticipate more. We've made good progress on our integration with Wavecom. We've lowered product costs and taken operating costs out of the business.

We've deployed our new organizational structure, seamlessly transitioned key programs, and deployed IT infrastructure to facilitate efficiency and growth. Looking forward, we're expecting improved results in Q4 despite continued flash memory supply constraints. We also believe that we're laying the foundation for continued growth and improving profitability as the business cycle strengthens.

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

(Operator Instructions) Your first question comes from the line of Mike Walkley. Your line is open.

Great. Thank you very much. Dave, a great job on the integration restructuring costs. I was wondering if you could just help us understand how far you are in restructuring and how much is left? Maybe asked another way, with the $43 million in non-GAAP operating expenses, can this amount still go lower if your revenues are at similar levels?

We're certainly not finished in the integration process with respect to cost reduction, Mike. So, we do expect costs to go down. We indicated on the last call that we were trending towards a $40 million number in Q1. So, we have a little bit more work to do, but we're making good progress.

Great. That's helpful. And then, Jason, it sounds like you had some supply constraints, but a very strong pipeline of new projects coming to market. How should we think about seasonal trends? Some of your new products may be pushed into Q1. So, we could expect maybe less muted seasonality off the holiday season?

It's certainly possible, Mike, since some of our new product launches haven't yet occurred, so we'll have some contribution from those new product launches in the current quarter. But it's certainly possible that some of those will spill over into Q1. That could mitigate the impact of normal seasonality. By the way, it's not only our products, but also launches at some of our OEM partners.

Great. For the flash constraints, is that mainly to some Wavecom modules or is it also delaying some of these new project launches?

It's only on the Wavecom side of the house and it's only certain products within the Wavecom line. Unfortunately, a couple of them are volume runners.

Okay. Great. One more question for me and I'll pass it on. Just, Jason, what's your view? You have this Novatel MiFi product creating a lot of interest at the store level. Do you see this as driving more awareness for mobile computing and actually helping drive USB modem sales? Or has this product somewhat cannibalized the USB modem and PC card market?

With respect to our own business and clearly MiFi is in one of our big channels with Sprint. We've seen pretty stable sell through for our products. So, there's probably some cannibalization, Mike, but it doesn't appear to be that great. It is possible that we're missing out on some market growth, perhaps, because of the presence of MiFi in that channel. But so far we have not seen a negative impact on our sell through reports.

I do think the product's interesting. The product clearly has a certain buzz around it and it's gotten some great promotional coverage. That helps bring people into the stores. Anything that helps sell wireless data is okay with us as long as it doesn't negatively impact our sales and it doesn't appear to have. We've expressed interest in this space in the past. Just last year we were close to completing a deal to acquire CradlePoint and that is the business of CradlePoint. You heard on the call here that we are planning to launch a personal hot spot of our own very soon. That certainly demonstrates that we believe the product category has legs.

Thank you very much and best of luck with your continued integration.

Thanks, Mike.

Your next question comes from the line of Barry Richards. Your line is open.

Nice quarter. Jason, can you quantify for us the business that might've been lost from the flash shortage?

It's hard to quantify any loss, Barry. I will say with respect to the short-term impact, it was probably in the neighborhood of $2 million. Maybe a little bit higher. Now, whether or not that business will be lost as a result really kind of remains to be seen. The concern there is we wouldn't likely lose the OEM customer but our OEM customer may lose their end customer as a result of not being able to supply. We're watching that closely. We haven't seen any significant quote losses as a result but obviously we've got some disappointed customers who are not getting their orders fulfilled.

Understood. Can you give us a percentage completion on the Wavecom integration?

You know, I think we're probably 75% of the way there, Barry. The big decisions are behind us with respect to structure and things like that. We will have some projects carry on into 2010 such as the ERP integrations. So, we'll be dealing with that for a while. But I would say 75% to 80% complete.

Good job on that. And headcount?

We ended the quarter at 931.

Great. Thanks and good luck.

932. Sorry.

That's down about 20 from the previous quarter, Barry.

Great. Thanks and good luck.

Thanks.

Your next question comes from the line of Amir Rozwadowski. Your line is open.

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

Hi, Amir.

Hi, Amir.

In thinking about sort of the adapter business, Jason, once again, posting sequential growth here. How should we think about end demand trends right now? Are we at a point where some of the challenges faced earlier in the year are behind and we should continue to see growth in that category or have secular changes or challenges such as broader embedded availability begun to sort of shift the dynamic there?

I think in our AirCard business, Amir, we've seen what I would call modest sequential growth for the last couple quarters. That to us feels like an indicator of stable demand. USB for us, slightly up in terms of volume. Obviously we've see products like MiFi and an increasing number of embedded solutions in the market as well. So, I'd say if you take the market as a total, there's probably been a recovery in growth and I think that we are improving our position to take advantage of some of that growth with our embedded wins and our imminent entry in the personal hot spot segment.

Okay. That's very helpful, Jason. And if we think about your overall gross margin mix, certainly the addition of Wavecom has helped lift the gross margin profile of your overall corporate gross margin profile. You're not sort of the mid 30% range here. Is there further room for potential growth here? What are the puts and takes there that we should consider in looking out forward a year from now?

Lots of puts and takes, of course. I'm inclined to not think about gross margin as expanding, Amir, unless we get explosive growth in our solutions and services business. The market continues to have price pressure. We're doing a good job driving costs out of our products. I think we still have a ways to go there. As we look out on the future, we've proven in the past we are ready, willing, and able to trade a little bit of gross margin for volume and we'll be making those decisions along the way.

So, what factors should you be thinking about? Mix. Mix is a big factor. And as our mix either favors high gross margin products or favors low gross margin products, that's obviously going to have an impact on corporate gross margins. And price pressure, right? That's just a constant in our business that we need to manage carefully. We need to manage our ASP declines carefully and drive costs out faster than our ASP declines. Thankfully in the last couple of quarters, we've done a very good job of doing that and we continue to be focused on maintaining that trajectory but I'm just not comfortable saying we think we're going to expand gross margin right now.

That's very helpful, Jason. And then lastly, in talking about sort of price pressure, particularly in your adapter business, have you seen any shift outside of what you would consider normal pricing pressure right now?

I would say it's consistent, Amir. Intense and no more, no less intense than it was previously.

That's very helpful. Thank you very much for the incremental color, Jason.

You're welcome.

Your next question comes from the line of Bill Choi. Your line is open.

Thanks. Hi, guys.

Hi, Bill.

Hi, Bill.

First, I wanted to ask about this kind of the basic tax question here. What is your tax loss carry forward? And I think we've been thinking about low 20%, mid 20% type of effective tax rate on a non-GAAP basis going forward. Can you just update us on what we should be thinking about for taxes?

Certainly when last year and the year before when we were running the business at about a 8% to 10% operating margin, we had an effective tax rate in the low 20% range, Bill. So, I think depending on how your models move forward, as we approach a return to that over time I would expect that's where you would see our tax rate stabilize at. In the meantime, we are paying taxes in some of our entities where we've used our tax loss carry forwards and in other entities we have substantial shield and are not paying tax. So, for the immediate coming quarters, taxes are really not a big factor.

Do you have the balance for tax loss carry forwards?

I don't have that balance off the top of my head, Bill. No.

Okay. And just for this quarter, can you just reconcile, so earning from ops, excluding all these one times non-GAAP, that's $5.1 million. And then you have net earnings non-GAAP of $5.9 million. So, this kind of says there was a tax benefit in the quarter. Obviously that shouldn't be something we look forward to next quarter. Just confirm what the taxes did here in the quarter itself?

In this particular quarter we had some specific recaptures of some 1048 balances, provisions we had taken that we've reversed. That's why the tax number is in a recovery situation.

Okay. To follow, just looking at effective tax rates, still again low 20% is a good number to use?

Yes. But I wouldn't -- the rate is much, much lower in the coming quarters as we ramp up profitability. So, I would not use 20% in the near quarters.

Is there a better number you would use here?

Bill, taxes are going to be very minimal for the coming quarters. I think our cash tax rate, we've probably paid about $700,000 of cash ex the recoveries on 1048 this quarter. So, think about that number as a proxy in the coming quarters.

Okay. You've provided some information about how far along in the integration you are, but if I just think about the Wavecom results here, when is the target for breakeven? Certainly the flash constraints, et cetera, doesn't help in the quarter or near-term, but any specific targets for at which point you'll see breakeven?

I think as we roll into the first half of 2010 and with a little bit of revenue growth and come continued OpEx reduction, that's probably the timeframe we would expect. Revenue growth would have to -- we would have to see revenue growth from these levels though and a little over $40 million - between $40 million and $45 million would probably be a breakeven watermark.

Thanks for that color. Does this also depend on getting ERP setup? I mean, rolling out ERP has been the bane of many companies' integration process. What are thinking about completion date for ERP integration?

Middle of next year, Bill. These projects quite commonly take a year plus to make the decision and do the conversion. But I have to say we're coping quite well as a bridge until that time.

Okay. One last question. Jason, so Sprint is now trying to sell the WiMAX-EVDO cards. Franklin is the supplier for that. How are you looking at 4G and when do we see products that address some of these opportunities?

It's clearly, with respect to WiMAX, Sprint's version of 4G, it's important. It's been in our R&D shoot for some time. Clearly our goal is to launch combo CDMA-WiMAX products with Sprint. We like to believe we're in a good position to secure an important channel slot there for those kinds of products. And that will be some time next year. We're inclined to think about it as the first half of the year.

Great. Good job on the integration.

Thank you very much.

Your next question comes from the line of Chris Li:. Your line is open.

Hi, guys. It's Chris Li here for [Sara Kim].

Hi, Chris.

Sticking with the PC adapter business, do you guys see any near-term opportunities to gain some new operator customers? Or is the opportunity for growth mostly hinging on market share growth and consumer behavior?

I think that there's -- it's definitely a combination, Chris. We're launching five new AirCard products between now and the end of the year and not all of those are for AT&T, Sprint, and Telstra. So, clearly some of those are intended to be for -- to broaden our position in existing channels and hopefully take some share elsewhere. I will say that the majority of our roadmap and efforts, of course, is driven by our existing big customers and I do see that we have some potential share gain opportunities as we launch new classes of devices.

Any other color you can provide on the differentiated hot spot and the channel you secured? Is there going to be a delay from when you launch the product to when the channel accepts it? Or are they going to stock it right away?

So, I'm not going to give any more product color. But with respect to timing, we've got a complex development effort underway. It's certainly not risk free. However, we have a very motivated customer as well. So, our view on that is we need to execute and if we do, I think that introduction launch and availability in stores would happen very quickly.

Switching over to the M2M side, these flash constraints, do you expect that to rectify itself in Q4? Is that likely to carry over into 2010?

Our expectation at this point in time is that it will continue through the balance of the year and we are hopeful that it will not impact Q1. But it's still a little bit early to tell, Chris. That's literally a day by day battle.

Okay. I guess just last question from me before I hand it over, what kind of growth rate are you guys expecting for M2M? I know that sales cycles are longer and it's still early. Visibility might be low. But what can we expect in the long-term? Say, throughout 2010 and maybe in 2011?

Overall our expectations are for growth somewhere between 25% and 30%. That's the way we're thinking about it. Of course you need to have a stable macroeconomic situation, I think, to enable that kind of growth. But longer-term, that's what's in our mind and that's what most of the industry pundits are standing on.

That helps. Thanks, guys.

You're welcome.

Your next question comes from the line of IlyaGrozovsky. Your line is open.

Hi. Thanks, guys. My question is about the guidance for the fourth quarter. After a couple quarters of essentially flat revenues, what's actually leading you to think that revenues are going to be up next quarter? Is it more seasonality of the business? Or is there something inherent that you're seeing in resumption of growth that should continue into next year?

It's a combination of factors. There's never one big moving piece. Clearly, seasonality is a factor. New product launch is also a factor. That tends to contribute a little bit more than normal run rates. And I think we've got a fundamental building in our number of design wins and number of customers we're shipping to, particularly on the M2M side. Those are probably the three main factors I would point to.

In addition to that, we feel pretty good about the backlog. We mentioned bookings. Bookings were pretty good in Q3 and we had a book to bill of significantly over one, that we feel like even though we're fighting some supply chain things and have to execute on launches, that gives us pretty good visibility on what we have to do to secure the revenue.

Do you anticipate that that continues into the March quarter? Or is that something that you think it's a seasonal and sort of steps back down afterwards?

Well, you'll have to listen in on the next call.

I have one other question. The earnings from operations, the guidance for earnings from operations for the Sierra business -- higher revenues, but actually lower earnings from operations relative to this quarter. Is that given the new product launches that you're anticipating this quarter? Why? That's sort of not adding up for me.

That is the correct way to think of it. In a heavy launch quarter, we've got both certification costs and sales and marketing launch costs that go along with newly launched products.

Great. Thank you.

You're welcome. Are there any more questions, Sean? Sean, are you there? I guess he's not. Okay. I think with that we are unfortunately in a position where we have to end the conference call unless Sean comes back on the line. Well, thank you, everybody --

Pardon me, Mr. Cohenour.

Yes?

I'm terribly sorry for the inconvenience. We just had a temporary power outage on my end. We will continue on with the questions?

Yes. We'll take a couple more questions.

Very good. IlyaGrozovsky, if you may continue?

My question has been asked and answered, thank you.

Thank you very much. Your next question comes from the line of Dev Bhangui. Your line is open.

Hi. Good afternoon, Jason and Dave. Congratulations on robust revenue and upside surprise on the earnings.

Thank you, Develop.

Thank you.

I just want to kind of go deeper in terms of what seems to be attractive to me in terms of variance which are your services and model revenues. So, in terms of all the wins you guys have announced with Visio and HardCom as well as I guess I would even consider the MOU with T-Mobile to be in the same kind of category. And you said on the call that you guys are intending to push this further in terms of growth, the asset management services. Can you tell us how big you expect this to become and what timeframe?

I want it to be very big, of course. And timeframe is really completely unpredictable right now, Dev. But I will tell you we've got a good size team from an R&D and operational standpoint. So, I've got confidence on the platform, confidence on the product. I've got confidence that there is demand. I've got to tell you, almost every meeting I'm in, there is a great deal of excitement around the kinds of services and capabilities the platform can bring to operators and OEMs. You know, for us, getting connected to a number of operator networks is pretty important and that would potentially put us in a position to rapidly scale, of course. Right? Because we would have a highly leveraged channel of distribution. But all this has got to play out.

I do believe that we'll be successful in getting a number of operators interested in and connected to our portal. And then it's going to be all about driving solutions through that portal and adding on top of that value added services, application tools, et cetera. So, I can't unfortunately give you any numbers other than our investment and focus is significant and we'd like it to be quite big and I think our timing is good because operators and integrators are very much turning their attention to this space, the machine to machine space, and looking for answers. And I think we're in a good position to have some of those answers.

Jason, just to kind of ask you for additional color on this, most of this business, whenever it grows, even now is a monthly recurring kind of revenue and the margins would be even higher than the 42% that Viacom's kind of internal business is generating, isn't it?

That's correct.

Can you tell us any kind of range? 65%? 70%?

Well, I think that takes volume, by the way, so early on you're not going to be driving that kind of margin in a host service because you've got some fixed costs, right? But I think when we get to volume, absolutely, I would expect that we would be able to drive for the software as a service margins in that ballpark. But it's going to take us some time to get there.

Okay. And very quickly, if you can, give us a little bit of detail in terms of the T-Mobile win. They already have your lightest competitors -- Siemens Wireless module is now called [Setevian] within the venture capital unit. You guys won this business against them I believe? Can you tell us -- and that during the heart of their business in Germany? So how come? What was the competitive advantage vis-a-vis somebody that they actually own and what's T-Mobile thinking in terms of growing from Germany as far as you guys are concerned as partners?

Thankfully there's a separation between their venture team and their operational team. I think that explains why the fact that they're partially owned by the giant T-Mobile didn't really become a factor. So, why us? I think they were convinced, as are a number of other operators that we simply bring more assets to bear on their efforts in machine to machine.

One last question, if you don't mind. Just in terms of guidance, I guess you guys have announced several new products. I'm sure with each product there is at least on carrier associated. All those other come into in terms of the initial large uptake, the pile up for the entry is going to happen in Q4 and that's also going into Q1. These products carry high margins. David already said that you guys are going to go down to $40 million in terms of OpEx. All these things considered, I'm sure the guidance is very conservative at least in terms of both, I would say, top line as well as on the bottom line. Would I be wrong to say that?

Yes. You would be. We think that we've given pretty good risk balanced guidance as we normally try to do. Guidance as you know has not been easy in the last few quarters, right? I think we've got a good risk balance number there.

Be careful on gross margin expectations on new products. Sometimes, well, usually your product costs are always highest in the launch quarter. Right? Because that's loaded with a lot of development history up to the date of launch, right? So, a lot of that gets piled into -- your costs of goods tends to be frontend loaded, I guess is what I'm driving at. So, be careful on gross margin expectations on new products. Some of those new products are designed for more volume markets.

The USB 3.01, 3.02, good examples. Those are really targeted at high volume channels like prepaid and consumer. So, be careful on that. And then timing of launch is another key factor, right? We're launching in October, I would agree maybe $143 million looks a little conservative. But we're not. Those launches will be spread over the course of the quarter. So, there's a timing of revenue impact that we've tried to factor into the guidance.

Okay. That's all I've got right now. Thanks, Jason and Dave, and all the best.

Thank you very much, Dev. Sean, we'll take one more question.

Very good. Your next question comes from the line of Todd Coupland. Your line is open.

Good evening, gentlemen.

Hi, Todd.

Hi, Todd.

Just a financial question to start off. So, you called out $5.1 million but then you mentioned $1.5 million FX gain and $200,000 in tax. And then you compared that to $2 million. So, would the $2 million have had any FX or tax assumptions in it or should we strip out those two items to sort of get a like for like comparison?

Those would be comparable numbers, Todd. And yet they would have some tax assumptions in them in the normal course. But they would be numbers on a comparable basis.

Defined in the $2 million?

Yes.

But the $5 million includes the $1.5 million gain?

No. It doesn't. It actually excludes.

I'm sorry. I misheard that. So, it excludes the $1.5 million FX gain?

Correct.

Okay. Sorry about that. First quarter on here.

I think you're comparing to the equivalent Q2 number of $2.8 million earnings from operations.

Okay. Fair enough. Second question relates to the shortages impact in your guidance for Q4. You talked about a couple million in the third quarter. What's your sense on the impact? What have you assumed for the Q4 quarter?

It's probably in the same order, Todd, approximately.

Is the right way to think about this the older products just basically aren't getting treated as well as they should be in the supply chain but your new products are getting priority so those are getting out the door?

No. It actually is driven by a massive restructuring in the flash memory market. Couple guys went out of business. One supplier sort of became king. That one supplier is struggling to keep up with a dramatic increase in demand as a result of some of their competitors going out of business.

Okay. And in terms of the sequential lift in revenue, do you typically call out how much is new products and how much is seasonal?

No. We don't.

Okay. That's great. Thank you very much, gentlemen.

You're welcome.

Thanks, Todd. Sean, I think with that we'll end the official call and as usual, management will be available here in the office for follow-up questions.

Thank you very much, Mr. Cohenour. Ladies and gentlemen, this concludes today's conference. You may now disconnect.