司亞樂 (SWIR) 2009 Q4 法說會逐字稿

Good afternoon, and welcome to today's conference call. I would like to turn the conference over to Mr. Jason Cohenour. You may begin.

Thank you, Shawn. And thanks for everybody for joining today's call and this is our fourth quarter 2009 results. And first quarter of 2010 guidance.

Joining me on today's call is Dave McLennan, the Company's CFO. A reminder that the contents of today's webcast and con call is covered under our Safe Harbor statement, which is being webcast right now, and additionally that access to our webcast is available for replay on the Company's website. The agenda for today's call is I will provide a business update on our business in general and lines of business, I will then ask Dave to walk us through the Q4 2009 results, and also the Q1 2010 financial guidance. We will then open the line up for questions.

Onto a general business update for Q4 2009. Our fourth quarter revenue of $144 million represented solid sequential growth of 6% over Q3, and 8% on a year-over-year basis. Our growth was driven by strong demand for our M2M product lines, an area of our business that we believe has compelling growth prospects, in an area where we believe we are extraordinarily well positioned.

Sales of our AirPrime embedded modules and AirLink M2M gateways delivered very strong sequential and year-over-year growth, even in the face of continued supply constraints on key components. We also secured several new design wins in key segments and geographies as well.

Additionally, we continued to drive strong momentum in our strategic quest to establish the Company as a leading provider of end to end solutions. Expanding our AirVantage hosting infrastructure, and securing new customers, including our first cellular operator win.

I believe it should be clear to all that our position in M2M is unrivaled. We have the broadest, most differentiated product lineup in the business, the strongest global footprint, unmatched innovation capability, and all the value chain elements needed to bring full end to end solutions to the marketplace. We intend to leverage the strength of our position to drive growth and leadership in this line of business.

And while sales of our AirCards were lower than our expectations, we maintained very strong channel positions with our key operator customers, and launched market leading products as well.

Our strong revenue growth drove non-GAAP earnings from operations of $3.7 million. While this result is solid, it's below our expectations. The result of a product mix shift in our business, which impacted gross margin, as well as some program cost reductions are taking more time to realize than originally expected. That's in combination with some selective investments we are making in compelling growth areas. To be clear, we remain committed to hitting our stated cost structure targets over time, while also investing for leadership.

We also achieved solid cash flow from operations of $3.7 million. And ended the quarter with $134.4 million, or about $4.30 per share in cash and equivalents. We continued to make strong progress on our integration efforts with Wavecom, implementing our previously announced site rationalization plans, putting in place important infrastructure elements required to support our global business. And recently launching new corporate and product line branding that we believe more accurately reflects our new, more diversified business, and our position in the markets we serve. 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 M2M.

Moving to product line updates, I will start with our AirCard product family, which includes our PC card, express card and USB devices. Q4 AirCard sales were $62.9 million, down 20% sequentially, and down 38% year-over-year. We believe our channel position in this segment is stable. And that the sequential decline is attributable mainly to the timing of product transitions in our key channels, ASP compression, and generally lower than expected sell through during Q4.

AT&T and Sprint were once again key revenue drives in Q4, and we believe our channel position with both of these operators continues to be strong.

We also experienced significant Q4 revenue contribution from TELUS in Canada, SOFTBANK in Japan, Telstra in Australia, and Telefonica in Spain. During Q4, AT&T launched our AirCard USB 305, a next generation HSPA device, which AT&T has dubbed the USBConnect Lightning. Lightning is now available on AT&T retail, online, and in business channels across the US.

We were also first to market with HSPA plus in Spain, where Telefonica launched our new AirCard USB 307, a next generation HSPA plus device that delivers download speeds of up to 21 megabits per second. On January of 2010, we achieved another world first, launching the fist ever 3G, 4G mobile hot spot with Sprint at the CES show in Las Vegas. We are ramping production of the Sprint Overdrive in the current quarter, and expect it to be a featured device in the Sprint lineup. We are working on successor products to Overdrive as well, including 3G, 4G USB devices, which we expect to launch in the first half of 2010.

We are continuing to focus our efforts on AirInterface innovation and differentiation for our key AirCard customers. Over the course of the year, we expect to be launching several new AirCard products supporting dual mode EVDO WiMAX, dual carrier HSPA plus, which runs at 42 megabits per second, and LTE.

Moving to our AirPrime embedded modules product line. In Q4, revenue from our embedded modules was $67.6 million, up 52% from Q3 and up 213%, from Q4 of 2008. Our remarkable growth was driven by a broad base of products and segments, those sales to Barnes and Noble and key automotive customers were particularly strong.

Sales of legacy Wavecom products contributed $39 million in embedded module revenue during Q4, that's up from $29 million in Q3.

As in Q3, we were unable to fulfill all of our Q4 customer demand as a result of continued constraints in the memory supply chain. We expect memory supply to be constrained again in the current quarter, and expect some relief in Q2. With Wavecom we now have the broadest embedded module product lineup in the industry, covering 2g to 3.5 g, CDMA and GSM, and multiple form factors for different segments. Our lineup also includes a rich suite of software, from protocol stacks to realtime 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 proven hosted device management service running on our AirVantage platform. We now have many value chain assets to leverage in continuing to drive our leadership position in the M2M space. Our products and global capabilities have enabled us to establish a highly diversified channel and customer base, covering many regions and growth segments. We believe we are exceptionally well positioned in the M2M embedded solution space.

During the quarter, we also continued to secure design wins in key segments, including personal navigation, another global automotive OEM win, and a next generation design win with Barnes and Noble. While PC OEM was a small contributor in Q4, we have secured several GOBI design wins with notebook and netbook manufacturers, and have now commenced our initial shipments. Going forward, we expect revenue contribution from the mobile computing segment to grow in the coming quarters as a result of our design wins.

Moving to our AirLink M2M gateways business. We achieved record quarterly revenue in AirLink intelligent gateways of $11.4 million. Revenue was up 11% from Q3, and up 34% from Q4 of 2008. Wavecom contributed $2.5 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 AirLink sales, and we saw steady demand from key segments such as energy management, police, fleet management and business continuity.

Also during the quarter we saw initial returns from our efforts to expand our AirLink business internationally, securing new wins and channels in Europe, Asia, and Latin America. During the quarter, several of our new AirLink products received network approvals from leading operators in regions around the world, and were subsequently launched. We expect to be launching new AirLink products for an expanding set of segments and geographies throughout 2010.

A continuing area of focus with our integration is to drive leverage between our AirLink gateways and AirVantage solutions and services platform. To that end, our AirLink and AirVantage teams have been actively engaged in integrating our AirLink gateway products with our AirVantage M2M services platform, creating end to end hosted solutions. The teams are making good progress on this integration effort, and have already collaborated on a number of end to end demonstrations and customer proposals. We expect to be launching packaged end to end solutions for certain vertical markets this year.

Moving to our AirVantage solutions and services business line. Our AirVantage solutions and services business was a small contributor to overall revenue in Q4. But we are very focused on growing this business into a key revenue and profit 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 proven in live customer environments.

Our intention is to sell our portal services, tools and applications on a recurring revenue software as a service basis to operators, OEMs, integrators and selectively to large enterprise accounts. These efforts are well underway and will expand over time.

We believe our platform offers the most comprehensive and scalable solution in the market today. Following many meetings with perspective customers, it is clear to us that operators, OEMs and integrators find our solutions, services and capabilities, compelling and unique in the market. We now have formal engagements with a number of customers, including PSA Peugeot, who will use our platform for device management and software delivery, CBS Outdoor, who uses our platform and portal to monitor thousands of billboards, and ORBCOMM, who will use our platform to enable remote device management and subscription management across both celestial and terrestrial wireless networks.

During Q4, we continued to achieve important milestones in our development of this business. Including an agreement with Atos Origin, who will use our platform to deliver large scale M2M solutions across Europe, and we also secured our first cellular operator win. This operator intends to use our AirVantage platform to enable and deliver M2M solutions and services to its customers. We expect to continue to add more prominent names to our customer list in the coming months.

Recently we also took a big step in expanding our global hosting footprint, commissioning a second hosting center with IBM in British Columbia. We now have two redundant hosting centers to support our global customers, one in France and one in Canada. In addition to building a larger software to service business over time, we also believe that our AirVantage solutions and services platform adds synergy and value to our other lines of business. Our device portfolios, differentiated in their own right, are now also tightly integrated to an end to end connected service. We believe this adds another layer of unique differentiation, which over time will help drive further share gains and margin expansion.

We believe we are making a significant investment in expanding our AirVantage platform and business at exactly the right time. In general, M2M is gaining momentum. Operators are forming teams and strategies around M2M and investing heavily. To facilitate the expansion of their M2M efforts, operators need tools and solutions and answers. And we believe through a collection of our hardware, software, and services platform and vast network of M2M solution partners, that we are ideally positioned to provide operators and OEM the solutions, capabilities and answers they need.

On to an update of our integration with wavecom, we believe that our integration with wavecom is going well and is on track. Over the past year, we've made significant changes to our management team, the organizational structure and geographical distribution of team members. The new global team has been in place for several months now, and is settled and working well. We have continued to capture solid product cost synergies, even in an environment where the supply of some key components such as memory continues to be constrained. We also believe that our product cost synergies will continue to improve over time.

Customer feedback regarding the combination continues to be overwhelmingly positive, and I believe we are effectively leveraging our expanded product line, global platform and capability to secure new design wins and to capture growing share. I believe this is evident in the revenue growth we've experienced in our M2M product lines in general, and in the sales of legacy Wavecom products specifically.

We have made strong progress in our site rationalization plans and cost reduction initiatives, implementing several changes to facilities and staff. However, some of our programmed reductions are taking longer to realize than originally expected. But to be clear, we are committed to achieving our previously stated cost structure goals over time.

And as mentioned earlier, we recently launched our new integrated corporate and product branding, reflecting the new, more diversified Sierra Wireless and the markets we serve.

I will now pass the call over the Dave who is going to cover Q4 results and Q1 guidance.

Thanks, Jason. And good afternoon, everyone. We reported results on a GAAP basis but also present non-GAAP results in order to provide a better understanding of our operating performance. Non-GAAP results exclude the impact of any Wavecom transactions costs, restructuring costs, integration costs, purchase price amortization, acquisition of related FX gains and losses, tax adjustments, non-controlling interest and stock based compensation.

Our consolidated fourth quarter results are as follows, GAAP and non-GAAP revenue was $144 million. This sequential growth was largely driven by a significant improvement in the embedded module sales. Consolidated GAAP gross margin was 32.9%. And after adjusting out stock compensation of $100,000, was 33% on a non-GAAP basis. The decrease from Q3 GM of 34.9%, generally reflects a mix shift to lower margin products. But overall we are still very pleased that we have gross margins at 33%, I believe that reflects solid performance.

Consolidated GAAP operating expenses were $48.5 million. On a non-GAAP basis, OpEX was $43.8 million, and excludes several things, including a reversal of Wavecom purchase price amortization of $3.7 million, and I will speak more about that in a minute. AirLink PPA of $600,000, restructuring costs of $4.7 million, stock comp of $1.5 million, integration of $1.3, and write offs and transactions costs of approximately $300,000.

A bit more color on the purchase price amortization adjustment. During Q4 we completed our Wavecom purchase price allocation to acquired assets and liabilities, and as a result we trued up the amortization of intangibles, which had been expensed since the acquisition to the actual amount based on this final allocation. This resulted in a net reversal of $3.7 million of PPA associated with Wavecom. This reversal is excluded from our non-GAAP numbers, so it had no impact on our non-GAAP numbers. Going forward in 2010, we expect quarterly purchase price amortization to be a total of $3.6 million.

In total, non-GAAP operating expenses of $43.8 million were approximately $1.5 million higher than Q3, and primarily reflect the additional expenditures incurred in Q4 to support the launch of Lightning, our newest AirCard product at AT&T, and final development and certification of Eagle, our 3G, 4G, mobile hot spot at Sprint, which was launched early in January of this year. Fourth quarter loss from operations was $1.1 million, and on a GAAP basis, a positive $3.7 million, on a non-GAAP basis.

This is below our non-GAAP guidance of positive $6 million. The shortfall in expected earnings from operations is a result of slightly lower than expected gross margin, driven by product mix shifts, some program cost reductions, taking more time to realize on than originally expected, and selected investments in compelling growth areas.

On a net basis, our GAAP net loss of $2.7 million, or a loss of $0.09 a share, and on a non-GAAP basis, net earnings was positive $2.7 million, or $0.09 cents a share. In addition to the non-GAAP adjustments that I spoke to earlier in earnings at the earnings from operations level, non-GAAP net earnings further excludes FX on inter-company balances, tax adjustments, and non-controlling interest related to the non-GAAP adjustments. A lot of numbers here with GAAP to non-GAAP reconciliation, and for your reference there's a detailed walk through of these reconciled amount adjustments, and that's been posted on our website.

Looking at the legacy Sierra and legacy Wavecom results on a segmented basis, legacy revenue, Sierra revenue was $101.9 million, that was slightly below guidance of $107 million, and flat compared to Q3. And this reflects lower than expected AirCard revenue, partially offset by strong embedded module sales, including modules for the Barnes and Noble Nook eReader. Lower revenue and higher than expected OpEX driven by new product development and launches, resulted in lower than expected non-GAAP earnings from operations of $6 million, versus guidance of $9 million for our legacy Sierra wireless business.

For the legacy Wavecom business, revenue of $42.1 million was above guidance expectations of $36 million, and represented sequential growth relative to Q3 of 27%. This reflects solid automotive OEM sales, and recovering sales in a variety of industrial segments, as well we benefit in Q4 from some end of life demand on several products.

As a result of this stronger than expected top line performance, non-GAAP loss from operations was $2.3 million, that's better than guidance, our guidance of a loss of $3 million. We are very pleased with the steady recovery that has occurred at Wavecom's business since the acquisition, with revenue growing from $28.5 million in the first quarter of 2009, to over $40 million in Q4.

During Q4 we continued to see the diversification benefits of the Wavecom acquisition on things like customer concentration, geographic distribution, and product mix.

During Q4 our two largest customers were Sprint and AT&T, and combined they contributed 28% of revenue, that's compared to 57% in Q4 of 2008, which was the last quarter prior to the acquisition. This represents a significant reduction in customer concentration.

Our product mix became more balanced as well, due to the addition of Wavecom. In Q4 2009, 44% of revenue came from AirCard, versus 77% a year ago, and embedded rose to 47% in Q4 '09, that's up from 16% a year ago. Also with Wavecom, we have a much broader geographic distribution, about half of our revenue is now coming from outside North America.

A few comments on cash and selected balance sheet items. Our cash and short-term and long-term investments totaled $134.4 million at the end of Q4, and during the quarter we generated cash from operations of positive $3.7 million.

Legacy Sierra DSOs were 50 days, and that is down from 55 days at the end of Q3, and legacy Wavecom DSOs were 43 days, that's down from 61 days at the end of Q3. And we also continue to tightly manage inventory, inventory modestly increased to $24.7 million at the end of Q4 compared to $23.4 million at the end of Q3.

Moving onto guidance for the first quarter of 2010. We're providing Q1 guidance on a non-GAAP basis, which excludes Wavecom transaction and integration costs, restructuring costs, stock based comp, acquisition amortization, FX gains or losses on amounts related to the Wavecom acquisition, and non-controlling interest related to the non-GAAP adjustments.

This guidance reflects the uncertain macroeconomic environment. It also includes revenue contributions from recently launched and expected new product launches in Q1, and is constrained by expected component supply shortages on certain products.

Our Q1 revenue is expected to be $150 million, that's sequentially up 4.2% from Q4. We expect Q1 non-GAAP earnings from operations to be $3.5 million, relatively flat from the Q4 level of $3.7 million, and Q1 non-GAAP earnings are expected to be, net earnings are expected to be $3.3 million, or $0.11 per share.

This guidance incorporates a gross margin percent expectation in the low 30s, and non-GAAP OpEX of approximately $43 million. OpEX is above our earlier target level of approximately $40 million, and reflects the balance we are striking between reducing costs and investing in the business. We remain committed to hitting our stated cost structure targets over time, while also investing for leadership.

Back to Jason to wrap up.

Thanks, Dave. So to summarize our Q4 results and Q1 guidance. We achieved solid Q4 revenue growth and results, driven by the strength of our M2M product lines. We once again experienced the diversification benefits of the Wavecom acquisition, with lower customer concentration, and improved geographical and product mix balance than we have seen historically. We continued to generate solid cash flow from operations, even while investing heavily in our integration of Wavecom.

We believe that our markets of wireless for mobile computing and M2M are gaining momentum, and have strong sustainable growth prospects. Furthermore, we believe that we are exceptionally well positioned in our markets, with the industry's broadest product line, broadest global footprint, and end to end solutions capability. And we are investing to build on our leadership position.

A key area of investment is in our product lineup, and we continue to bring wave after wave of leading edge products to market that address the needs of our current customers, while also opening up new segments and new opportunities. We have definitive proof points that our AirVantage services and solutions platform is ready for prime time, valued by our customers and uniquely positioned in the market. We believe this platform will be an important facilitator of differentiation, growth, and margin protection over time.

We've made good progress on our integration with Wavecom, we've lowered product costs and taken operating costs out of the business. We have deployed our new org structure, seamlessly transitioned key programs, and deployed IT infrastructure to facilitate efficiency and growth. We have remained committed to hitting our cost structure targets.

Our bookings in the quarter were strong, giving us good visibility to Q1 revenue. And looking forward, we are expecting continued sequential growth in Q1, despite continued flash memory supply constraints. We believe that we are executing our strategy well, and that we are well on our way to building a global leader in wireless for mobile computing and M2M.

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

Thank you. (Operator Instructions). Your first question comes from the line of Barry Richards with Paradigm Capital. Your line is open.

Good afternoon, Jason and Dave. In the past you have given us a split between Wavecom, the old Wavecom and the old Sierra, on revenues and earnings. This time you didn't, is there a reason, and if not, can you give us some direction on whether you think both businesses grow or something else.

Sure, I will give you some commentary on that, Barry. The fact is, as the businesses become more completely integrated, it's going to be really tough to distinguish what is legacy Wavecom, what is legacy Sierra Wireless. So we are going to be weaning you guys off that segmented information over time, and what we would really like you to start focusing on is the product line segmentation that we put up. But to give you some directional commentary on what we think's going to happen in Q1, we think Wavecom will be down a little bit sequentially, and we think Sierra will be up a little bit sequentially. And that represents continued momentum with large legacy Sierra OEMs like Barnes and Noble, and potentially a recovery in the AirCard business, too.

Great, thank you. And in the past you have also given us, at least the last three quarters, percentage completion on the Wavecom integration, I think last quarter you said it was about three quarters, can you just give us an update on where you are at today.

Barry, it's Dave, I would still put us around the 80% mark. The big item to come is the ERP conversion, and we will be working on that throughout the first half of this year. So, that's a big item that comes at the end of the integration process.

Great, and last question, any comments on inventory in the channel?

I think inventory in the channel is pretty thin, Barry. Is our view.

Any different from last quarter?

No. I think operators are still managing channel inventory pretty tightly, and it's, they keep their pulse on demand, and if they feel like they need to increase supply then it becomes a more urgent matter. So I -- my read is particularly AirCard inventory, which is what we get regular reports on, it appears to us that AirCard inventory overall, it differs operator to operator of course, but AirCard inventory overall is pretty thin in the channel.

Thanks, and good luck.

Thank you.

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

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

Hi, Amir.

Hi, Amir.

Jason, you had talked a bit about some of the flash memory supply constraints, sort of impacting your ability to hit full customer demand. Is there any sense you can give us about the magnitude of that impact, either in the quarter and particularly in your sales outlook.

It's tough to size but I would put it in the low single digit millions, probably in the $3 million to $5 million area.

Okay. That's very helpful, Jason. And then, if we are thinking about some of these programming costs that probably didn't come in line with your expectation, were those the material drivers of the higher than expected OpEX, or was it the investment side, I'm just trying to understand which of the two pieces was really the material driver there.

Amir, I would have to say it's both. It's balanced, and with respect to the program cost reductions taking a bit more time than expected, that was candidly our bad read, the actions we took were the right actions but the call on timing there was wrong.

So it is, from your perspective, more of a timing issue, Jason, as opposed to an ultimate inability to get cost to that level.

It is. It is. That's exactly how I would characterize it.

Do you have a sense of a new target or new timing that you would like to put out there.

Well, our target remains the same. We believe we need to get our cost structure to the $40 million a quarter mark. And that will have some lumpiness, but in terms of a solid run rate number, that's what our target is, so we are not backing away from that. And with respect to timing, I'm going to be careful because we already blew timing on it once.

Certainly, certainly. And then if I may just one last question, Jason, certainly it seems as though sales are a bit more robust in terms of the sequential progression that you folks are thinking about for March. How should we think about seasonality through the course of the year. Do you have any sense of how to gauge seasonality through the course of the year, or is it still, you still prefer to take on a quarter to quarter basis.

We prefer to take it on a quarter by quarter basis, but traditionally, we would expect Q3 to be kind of the softest quarter. Because of the summertime vacation impact primarily, and generally speaking, Q4 is the strongest underlying demand quarter. But so much of that is impacted by new product introduction. A lot of times, the seasonality is completely covered up by different events, like new product introductions, et cetera.

Okay, that's helpful, Jason. And Dave, if I may, I may have missed it, do you happen to give the stock options break down by line item. I know there's 100,000 in the cogs. I was wondering if you had the break down on sales and marketing, research and development.

Yes, sure do. So a total of $1.7 million, and that's $100,000 to 200,000 in cogs, sales and marketing of $400,000, R&D of $300,000, admin of $800,000.

Perfect, thank you very much, gentlemen.

Thanks, Amir.

Thanks, Amir.

Your next question comes from the line of Samuel Wilson from JMP Securities. Your line is open.

Good afternoon, gentlemen. I have like five questions, but they are all relatively simple, so forgive me but they are sort of straight forward. I'm sorry I missed this, do you have the geographic percentage break down by region.

Sure do. So, in the Americas for Q4 it was 52%. Europe was 15%. And Asia Pac was 33%.

Great. David, do you have a headcount.

Headcount was 947 at the end of Q4.

Great, and do you know what the diluted shares not the basic shares outstanding are.

The diluted share count is 31.042.

Got it.

It really doesn't matter whether it's diluted or basic.

Right. And Jason, just sort of the bigger picture questions, can you talk a little bit about the pricing environment in general, particularly not in the M2M business but in the AirCard business. And talk about the competitive landscape as you see it right now, particularly given the downturn and some of the damage that's been done to a number of competitor companies. What's it like out there when you're selling to carriers.

Well, the pricing environment continues to be very intense, I don't think that's not news of course, I would say it's been consistently intense. Interestingly enough, we have been able to hold our own pretty well on gross margin in our AirCard business, but we have to fight for every nickel of margin. And that's frankly a key part of what is driving our R&D machine is designing out cost. So these are often, our new next generation products that we launch are purely cost reduction initiatives, and that's really designed to keep pace with ASP reductions. So, so far we have been able to do a pretty good job of that and keep margins on our AirCard business pretty solid, but it's intense.

And then, just competition in general, are you seeing any new competitors, change in competitors, less competition for every deal.

Usual suspects. With respect to our channel position, I'm disappointed on our AirCard sales, but very pleased with our position in our key channels. I know that doesn't seem, that's a bit counterintuitive perhaps, but I'm quite confident that in our key operator channels we maintained and in some cases even have share momentum in that channel. We just had some special circumstances, and unfortunately lower sales out of some of those channels than we expected.

Got it, thank you very much, gentlemen.

You bet.

Your next question comes from the line of Todd Coupland with CIBC. Your line is open.

Good evening, everyone. Firstly on operating costs, it sounds like in the short to medium term, we should think about op costs, given all the puts and takes you talked about, in the $40 million to $45 million range with I guess a longer term goal of $40 million assuming you can bring the product cost down, is that the right way to think about it?

Yes. It's certainly our hope is to manage costs down, so I wouldn't rush to the $45 million number. And we are intensely focused on managing the cost down.

Okay. And how long does it typically take once you launch some new products to sort of get the maturity of the margin contribution from those products. You had several this quarter, you have several in the pipeline, so is this sort of one quarter and they pop up, or is it several quarters.

I'm not sure what the root of the question is, but I will share with you with respect to some of our products and some of our new products, recently launched products.

I guess I'm thinking of the eReader and I'm thinking of the 3G, 4G product typically.

So on Barnes and Noble, I would characterize Q4 as a bit of a ramp quarter. So we were just getting the supply chain cranked up, and we were chasing demands, we were a little behind Barnes and Noble's demand, is the way I would categorize it in Q4. And then I think we catch up a little bit in Q1, is our expectation. So I think we are in a stronger supply position for that particular customer in Q1, so I would expect that to take a significant step up.

Similarly I would expect our sales of the Overdrive device into the Sprint channel to step up, just launched early January, and we are in what I would characterize the kind of the first quarter of production ramp. So we will not be at maximum production capacity during Q1, but as we exit Q1 we will probably be up to full steam on production capacity.

Okay. So, like if we are thinking about Q2, and as we follow it over the course of the quarter for these two products, you should get up to some sort of normal level at least by the end of the quarter, and then it's real demand and sell through in Q2 that will drive your overall topline.

I think that's a good characterization, again the big change in Q2 from what you saw in Q4 and Q1 is, we will have our supply chain ramped up. We will have much better supply capacity to meet the demand in Q2 than we can right now.

Okay. Second product question, I mean, I'm relatively new to the Company but when I look at the AirCard business, that was a fairly dramatic drop quarter on quarter. You talked about poor sell through in the channel, can you maybe just flush out what is exactly going on there, is it enterprise spending hasn't turned back up because of the economy, your products aren't getting chosen, the carriers are not doing as well as they would have hoped, maybe other carriers in the market for this kind of product, maybe just talk a little bit about why we saw such a sharp dropoff there.

It's a combination, I would put that on three factors. One is, we are going through some product transitions with some of our key operator partners, Telstra is a good example, AT&T is a good example. We just launched the new Lightning product, and these transitions sometimes result in some softness during the transition quarter, Overdrive is another good example at Sprint, that's a transition.

The other thing is ASP compression, as we move from the mercury product at AT&T as an example to the Lightning product at AT&T, there is an ASP reduction there. So clearly, we have to sell more volume of Lightning to equal the same revenue as we got from the mercury product. That's another key factor.

And then the third is sell through. I don't really have a good explanation for that, I really believed that we maintained or even in some cases strengthened our channel share position. So that the only thing I would point to is in Q4 we didn't get perhaps the same level of promotion on our class of devices for our devices specifically than we have seen in quarters past.

Do you think that the carriers are promoting other types of devices. We have seen so many new smart devices and other products, it's obviously not the same, but is that having a bit of a drag here do you think.

But it's iShare, I believe there is. I believe there is a relationship to how many times you see a smart phone advertised on television versus mobile broadband devices, and clearly you saw a bit more smart phone on the air waves in Q4 than you saw mobile broadband devices, and I do think that's a competition for customers' eyeballs, and I do think that has an impact.

One last question, you talked about legacy products contributing in the quarter, and then you talked about $3 million to $5 million of supply constrained revenue, so should we view those two items as sort of a wash in terms of the legacy contribution, because I guess that's probably doing to go away, right. Or are the new products just going to make up for the legacy.

Not sure where you are going on the -- exactly what you mean on the two different things. Now with respect to the supply constraints, I can comment on that, which probably left $3 million to $5 million in revenue on the table. That's an educated estimate. And we don't think we are going to get full relief on that in Q1. The memory supply continues to be quite tight, but we do expect that we will have some loosening of the memory supply chain in Q2.

Okay, I will take the legacy question offline.

Okay.

Thanks very much.

You bet.

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

Thanks very much, guys. First, I wanted to ask for a little bit more color on the automotive win that you talked about. Maybe you could talk about the timing, size, what specifically you are doing for the customer.

Sure. It's another major automotive company through a US based tier one supplier, as you may recall our automotive business we sell to a tier one supplier who then supplies the auto company. In the case of our Toyota deal as an example, our customer is actually Denso, who is a large supplier to Toyota. This a similar arrangement, it's through a different tier one supplier and it's to a different global auto manufacturer, that is a, what we believe will turn into a high volume design win, and it's targeted for the US market.

Okay. So this was different than the Ford deal that you already talked about.

Different than the Ford deal, which is what I would consider to be a more of a narrow scope deal, that's focused on the Ford F150. So this is what we believe could be a significantly larger deal, perhaps on the same scale of our deal with Denso and Toyota Motor Corp.

Okay, and what kind of timing are you expecting and what specifically are you doing, is it just modules or are you doing any surfaces there.

We are doing modules. At this point in time we don't expect to be providing services as part of that solution, and that revenue won't turn on, Chris, until 2012, these automotive wins are long in gestation. But a good continuity win nonetheless, and we put it out there because as these automotive wins, first of all they are very sticky customers, and the product cycles are years, not months, right? And as these things stack on top of each other, I think it becomes a pretty good looking revenue picture when you combine this deal with the Denso Toyota deal with the Peugeot deal in Europe, and the other European OEM who we haven't named yet. And those all begin to stack on top of each other over the coming quarters.

Okay, and I know 2012 is a while out there, and the street doesn't tend to focus on that long-term stuff, but I think it's interesting and I think maybe it would be interesting if you could talk a little bit more about what the potential frame around the deal size might be. How do you think about quantifying a deal like that. Do these guys give you estimates or are they pretty firm in terms of what models they are going to be putting your product into, and you have a pretty good idea of how many that's going to be per year.

Yes, I mean some of that tends to be a moving target right up to launch in terms of target models, et cetera. But in terms of volume, that's hundreds of thousands of units a year.

Okay. That's quite helpful and quite a nice win, so congratulations on that. The next question I wanted to ask you about the Barnes and Noble ebook reader, you mentioned a second generation win for that as well. That's good, my interpretation of that means you've been fairly sticky in that product, if they're planning you already for the next gen. Is that right?

It is. That is a very competitive space as you can imagine, with rapid product cycles, but very high volume. So we are very pleased to have been awarded the successor slot there.

Okay, and then with respect to Q4 being a launch quarter, there were some signs in the news that that was a heavy demand product and doesn't surprise me that you are still ramping then in Q1. Do you feel like you are in a position where things could slow down at all in Q2, or does it look like the demand for this is strong enough throughout the year that you are not really expecting any kind of big sell-in followed by a big pause.

Right. Well, we are planning for continued growth, but always concerned, right? It's kind of a, certainly for Barnes and Noble, it's a new class of device, new class of service, and we do know that sales have been strong to date. We do know that there are promotional activities are expected to expand considerably. And we are planning to meet their forecast, which is for growth, but we won't know until of course the orders actually come and we actually ship, but so far it looks good.

Okay, so what you are saying is, for example the Q2 forecast on the product as it stands today would actually be still up from Q1.

Yes.

And that you can't be sure of any of this, of course.

We are inclined to think of it that way.

Okay, that sounds good. And then final question, Dave, this is probably better for you, I just want to verify that in your non-GAAP guidance, and when you do adjustments, you are not backing out foreign exchange.

We back out foreign exchange with respect to inter-company balances related to Wavecom, but we don't back out foreign exchange on the normal operating items.

So you don't back out the line item that shows up on the income statement or you do.

That has a couple of different aspects of FX in it. If it's just regular FX on our financial balances, no, we don't back that out, we consider that to just be a normal operating amount.

Okay, I guess I'm just talking about what shows up, I'm trying to flip to the right line item on the income statement here, but there is a line on your income statement called foreign exchange gain, in this case it's a loss. And that's $1.754 million. So are you saying some of that is excluded in the non-GAAP calculation.

Correct. Some of it is excluded and some of it is not.

Can you break it down approximately. It's a big number, so I think it's worth knowing.

Yep. So of that amount, $760,000 is excluded.

Okay. There is a about $1 million that is not excluded. And when you give guidance, are you planning this in advance and trying to guess at what currency is going to do, or are you just totally ignoring it.

If we could be that smart we would probably be able to hedge it and it would be zero. We don't plan for gains or losses.

Okay, I think it's worth knowing because if you are going to see significant movements in FX, which we always do, it's helpful to know if your non-GAAP results were significantly different like they were in this quarter and some of it does translate due to FX, right? So there's $1 million there of FX that hit you that you weren't really thinking about when you gave the $0.17 guidance, is that correct.

Correct.

Okay, that's really all I needed to know, thanks very much.

Just, Chris, examples of what would stay in would be if we hold foreign currencies and we have an FX gain or loss on that, we would not strip that out from non-GAAP results. So that would be an example of something that would not be stripped out. And we would just consider that a normal operating amount.

Okay.

Your next question comes from the line of John Bright with Avondale Partners. Your line is open.

Thank you. Guys, two questions, one around LTE, one around M2M. First, or probably two around M2M. First on LTE, Jason, how much work is going on now related to LTE, and in what areas, and also how would you characterize your visibility and even the opportunity in 2010 related to LTE.

Related to LTE, the way I would think about it is a small contributor in 2010, first of all. But a significant expense. We've ramped the R&D machine. We are planning to do a, what I would consider to be a, big step along the path to LTE, and that is HSPA plus dual carrier. That we expect to launch by the end of the year and that may be a little bit more of a contributor to the revenue than LTE. And that gets us quite far down the path to an LTE device, because for HSPA plus, dual carrier as an example we are implementing MIMO antennas, we are also leveraging significantly the RF platform. So it's not a huge leap from there to get to LTE.

So again, LTE small revenue contributor, significant investment ongoing, and our areas of investments are really driven by our key operator customers, so you can kind of guess where our dollars are focused. Given the weakness of our position in the Verizon channel as an example, you can probably guess that we are not doing a lot of AirCard investment on that flavor of LTE.

Next question, then is going to be related to the M2M. It's kind of twofold, as I hear you talk about strategy, the first thing and we've talked about this, where are we going to see examples, or signs that M2M, to use your prepared remarks, is gaining momentum, number one. And then number two, you talked about the differentiating aspect of your platform. Maybe if you could expand upon that as well.

Well, so I think one key thing to point to is, we had 52% sequential growth. So, I think there's going to be a lot of focus on our AirCard decline, but we had 52% sequential growth in our embedded module business. That was almost entirely driven by M2M, so I think that's a pretty key proof point, and our AirLink terminals, record quarter and up 11% sequentially. I think those are two big proof points.

With respect to overall industry proof points, I would look for operator announcements around M2M, I think that should provide evidence that operators are becoming more strategically focused in the area, spending money, building teams, that kind of thing.

With respect to our platform and its differentiated nature, first of all some anecdotal comments, as I go out and meet with potential operator customers and potential OEM customers, the feedback we are getting is, there is nothing that does all of what you do. There are players who do a little bit of device management, perhaps, maybe some subscription management, but they don't do the development tools, and they don't have a billing engine. And there are others who have the billing engine and perhaps the wireless reselling capability, but they don't have device management or subscription management.

So we have all of that, John. We have device management, subscription management, that's baseline functionality built into the platform, we're adding a billing engine right now. We've got a global hosting facility and we've got proven development tools that are being used by customers right now.

So in terms of all of the pieces of the platform or software value chain you need to actually make something work, we have it all. And our customers have been telling us, we are the only guys who have it all.

And the other thing I would add is it's very scalable. It's designed to be carrier grade. So, easy to scale, easy to add hundreds of thousands of subscribers, and even millions of subscribers, and it's simply architected that way.

So as the product mix, if this momentum continues and we start seeing good successes, seeing this more to the naked retail eye investors, and you have the better margin profile associated with this, you believe this is a differentiated and defensible piece of the business.

I do. I do. I think other -- we are not going to be alone in the space, but I think it's a-- I think it is fundamentally more defensible than other areas of our business. I don't think the big Chinese manufacturers are going to go off and build an M2M services platform. One example. So I do think it's more defensible.

And I do think as a stand alone business in and of itself, it's going to take time to build scale, a software to service business with scale, but I do think earlier rather than later we are going to get the benefits of the differentiation that allows us to bring to our hardware products. We have a different conversation when we go and talk to the next automotive customer. We talk to them about our market leading module portfolio and market leading professional services capability and global footprint, and oh by the way, this can be a completely connected service as well.

And nobody else in the market today can realistically say that. I think there is a dual track benefit.

Gentlemen, thank you.

Thanks, John.

Your final question comes from the line of Mike Abramsky from RBC Capital Market. Your line is open.

Yes, thanks for taking my question. Could you just give us a sense of what 2010 growth would have been without the Nook and what margins might have been without the Nook. I know you don't break this stuff out. But just trying to understand, and also Op EX is up. How much the nook is impacting these various areas.

Well I think a good indicator, Mike, is the stand alone Wavecom revenue of $42 million. None of that is related to Nook. The AirLink intelligent M2M gateway is none of that is Nook related. And so I think those are two good indicators of more broad based machine to machine growth in the quarter. I don't know if that helps you.

As an example, Wavecom embedded module revenue went from $29 million in Q3 to $39 million in Q4. None of that Nook related.

And what about the gross margins at Wavecom, have they trended differently since when you provided them in Q3?

Gross margins on the Wavecom business were in the mid-30s. And gross margins on the Barnes and Noble business is lower than that.

So I guess going forward, if the Nook is more successful, how do we think about your gross margin trends?

You think about our gross margin dollars as going up, that's for sure. I think it's safe to say, if Nook has a growing percentage of our revenue, it represents a growing percentage of our revenue, then that would tend to pull gross margin percentage down because it's below the corporate average.

I guess just back to your other point, why are Wavecom's gross margins down from 43% in Q3. So materially.

I point to mix, Mike.

Could you give us a little color on that by mix.

Well, there is lots of products in the product line, so it's hard for me to give you meaningful color other than there was a bit of a mix shift that included lower gross margin customers, such as Denso.

Automotive had some good growth, Mike, and that would have contributed to that mix shift.

Whenever you have a high volume customer, Mike, that's driving significant revenue, that will tend to drive topline up and usually gross margin percentage down.

What about going forward on the trend on the mix, do you see that (inaudible) or do you see that changing?

Beyond the Q1, it's hard to say. Our longer term business model, we are standing by it. We believe that this is a business that runs well with good growth at gross margin in the low 30s. And we need to drive non-GAAP OpEX over time back to the 20% level.

Then lastly, you talk about investments, is that price cuts or projects, can you give us some detail.

I wouldn't characterize it as price cuts, it's more project so, and sometimes launch activity. So there is interesting launch activity to invest in, whether that be in advertising campaign, or a regional promotional campaign, we will look at those opportunities selectively and sometimes invest more than we normally would.

And in addition, you have to look at things like the AirVantage platform. We really do believe we have something special there, and that clearly is contributing losses at this point in time, and we don't want to starve that business because we do believe strategically it's a vital part of the go forward plan.

And when you talk about advertising, is that like co-op marketing.

Like co-op, exactly.

Okay, so things like Overdrive.

That's right.

All right, thank you very much. Appreciate the answers.

Thanks, Mike, and Shawn, I think that's all the questions we have time for.

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