司亞樂 (SWIR) 2010 Q1 法說會逐字稿

Thank you for participating in the Sierra Wireless, Inc's First Quarter 2010 Results Conference Call. I'd like to introduce your speakers, Jason Cohenour, President and CEO, and Dave McLennan, Chief Financial Officer.

Thank you, Jessica, 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.

As a reminder, today's presentation is being webcast and will be available on our website following the call. The agenda for today's call is as follows. I'll first provide a general business update and then turn the call over to Dave, who will cover Q1, 2010 financial performance and Q2 financial guidance. I'll then return for some brief summary comments and questions and answers.

As a reminder, today's webcast and call is subject to the Company's Safe Harbor Statement. We're not going to read the statement into the record today. The statement is being displayed right now on the webcast on slide number two and I'll pause now for everybody to read it.

This presentation should also be viewed in conjunction with our Press Release and with the supplementary information on our website where you'll find complete reconciliation of GAAP and non-GAAP results.

I'll begin with a brief financial summary. Overall I am very pleased with our performance in Q1. Our revenue of $151.3 million represents solid sequential growth of 5% and 36% growth on a year-over-year basis and was above our guidance of $150 million. Our growth was driven by continued strength in our machine-to-machine business, including a 49% year-over-year increase in the revenue from the Wavecom business that we acquired in March of 2009.

Non-GAAP gross margin was 30.7% in the quarter, in line with our target business model and consistent with our expectations and guidance. Non-GAAP operating expenses were $42.3 million in the quarter, an improvement of $1.5 million over Q4 of 2009. This improvement is the result of our ongoing focus on cost reduction and our continued efforts to realize synergies from the integration of Wavecom. As we've stated on previous calls, we remain committed to reaching our target of $40 million in non-GAAP operating expenses per quarter. The combination of revenue growth and operating expense reductions led to improved non-GAAP earnings from operations of $4.1 million and non-GAAP earnings per share of $0.13.

During the quarter we also achieved an important milestone in the acquired Wavecom business. Driven by the revenue growth I mentioned earlier plus higher gross margin and a 28% reduction in operating expenses, the Wavecom business achieved breakeven results in the first quarter compared to a loss of $12.3 million one year ago.

Additionally, our cash sheet, our balance sheet remains very strong. At the end of Q1 we had $122.4 million in cash and cash equivalents and no debt. And finally, we're quite pleased to see strong bookings and an improving sell through trend line during the quarter.

At this point I am going to take a moment to introduce how we'll be presenting our segmented business results going forward. In the wireless space we're targeting two high-growth segments, machine-to-machine and mobile computing. Machine-to-machine, also known as M2M, is probably familiar to most of you who follow the Company. The M2M market represents an exciting growth opportunity for us and is a segment that is receiving growing focus from operators and OEMs globally.

Our definition of M2M aligns with the majority of the industry analysts following the market. It includes a broad range of applications and connected devices from emergency communication in the automotive sector to smart metering in the energy sector to eReaders and personal navigation devices for consumers.

We are the global leader in the wireless M2M space and provide solutions across the value chain from embedded modules and fully integrated intelligent gateways to hosted M2M solutions and an M2M service delivery platform. Starting this quarter we will provide a revenue split for the M2M business to help investors better understand the size and scope of our M2M franchise and its importance to the overall business.

Our M2M revenue includes AirPrime embedded modules excluding sales to PC OEM customers, AirLink intelligent gateways and routers and our AirVantage solutions and service delivery platform.

Our second line of business is mobile computing, which is focused on providing mobile broadband connectivity for notebooks and netbooks. We are a technology leader in this space, often coming first to market with devices that support the latest high-speed services being deployed by operators around the world. We have strong relationships with key operators, such as AT&T, Sprint and Telstra, and we supply them with AirCard mobile broadband devices including USB modems, mobile hot spots and PC cards.

We also have strong relationships with leading PC OEMs such as HP, Lenovo, Panasonic, Fujitsu and others to whom we provide embedded mobile broadband solutions.

Going forward, the revenues for our mobile computing business will include all sales of our AirCard mobile broadband devices, as well as sales of our AirPrime embedded modules to PC OEMs.

In our M2M business we had a very strong start to the year. In Q1 M2M revenue was $88.7 million, up 15% over last quarter and up over 187% compared to the first quarter of 2009. The M2M revenue increase was broad based. However, we saw exceptionally strong growth in the consumer space where our embedded modules are used in eReaders, personal navigation devices and other products. We are rapidly building a leadership position with our AirPrime intelligent embedded modules. We secured new design wins around the world, reached important milestones in key segments, such as automotive, launched our new SL series of [solder down] LGA devices and announced a new smart metering design win with long-time partner, EDMI.

AirLink intelligent gateways and routers continued to be a solid contributor delivering $10.5 million in the quarter. Our international expansion efforts with our AirLink products are beginning to bear fruit with significant new wins in Europe, Latin America and China. We also launched a unique bundled M2M solution offering with Bouygues Telecom of France.

Moving further up the value chain, the AirVantage services delivery platform continues to gain momentum as well. In Q1 we achieved new design wins, an industrial M2M and outdoor advertising and we had a successful launch of our services platform with ORBCOMM. We also made good progress in our deployment of the AirVantage services platform with our first cellular operator customer. We expect to go live with this customer in the second half of 2010.

We also made excellent progress during the quarter in our continuing effort to tightly integrate our AirPrime and AirLink products with our AirVantage solutions and services platform, strengthening our ability to offer end to end solutions and to drive differentiation across our product lines.

Overall we're excited about the progress we've made in M2M and believe we are the global leader in wireless M2M solutions. Looking forward we expect to see a small sequential decline in M2M revenue in Q2 driven by channel launch cycles for consumer devices. We do expect to see continued strong year-over-year growth in the segment.

Turning to mobile computing, we saw a sequential decline in revenue of 6%, as weaker than expected sell through in Q4 continued to impact sales early in Q1. Despite the weakness in Q1 we're confident in our AirCard business. We believe we've got a strong product portfolio and pipeline and leading channel positions with key operators.

We also saw good order flow for existing and new products and an improving sell through trend throughout the quarter. Our operator customers continue to rely on us for innovative, first-to-market mobile broadband products. So far this year we've launched the Overdrive, a 3G, 4G mobile hot spot with Sprint, and the AirCard 890 with AT&T. We also demonstrated our first-to-market dual carrier HSPA plus device with Telstra at Mobile World Congress. We expect to launch this product, which supports speeds of up to 42 megabits per second, later this year with Telstra in Australia.

During the quarter we also secured channel slots for future products including our first LTE awards. We're also making good progress in rebuilding our PC OEM business. During the quarter we announced production design wins with Fujitsu and Panasonic and saw our sales to PC OEMs increase sequentially for the first time in several quarters.

We also have new opportunities with tier one PC OEM manufacturers and expect to secure design wins for platform launches in 2011. Overall we see solid momentum in our mobile computing business and we expect that our improving sell through, solid bookings, new design wins and expected new product launches will drive sequential growth in Q2.

Before turning the call over to Dave for a more detailed financial review, I'd like to take a moment to make a comment on the transition occurring at Sierra Wireless. Recognizing the M2M opportunity early on, we've been investing in this market for some time organically as well as through the acquisition of Wavecom in 2009 and AirLink in 2007. The chart on this page clearly illustrates the success of our sustained investment, both in terms of revenue growth and diversification.

Our higher margin M2M revenue is now 59% of total sales and we're successfully navigating the transition from a company solely dependent on mobile computing to a diversified leader in wireless solutions for both machine-to-machine and mobile computing, while also capturing the powerful synergies between the two lines of business. I believe we're making excellent progress on this strategic transition and that over time it will prove very profitable for all our stakeholders.

Dave will now take us through the Q1 financial results in more detail as well as Q2 guidance.

Thanks, Jason, and good afternoon, everyone. As a reminder, we report our financial results on a GAAP basis. However, we also present non-GAAP results in order to provide a better understanding of our operating performance. Non-GAAP results exclude the impact of stock based compensation expense, acquisition amortization, Wavecom integration costs, restructuring costs, foreign exchange gains or losses, tax adjustments and non-controlling interest related to the non-GAAP adjustments.

As Jason stated at the beginning of the call, consolidated revenue in the first quarter was $151.3 million. That's up 36% from Q1 '09 and 5% sequentially from Q4 '09. Consolidated GAAP gross margin was 30.6% and after excluding stock compensation expense gross margin was 30.7% on a non-GAAP basis.

The sequential decrease in gross margin from 33% in Q4 was in line with our expectations and it was a result of lower AirCard margins. This is all about mix within AirCards, where we experienced a mix shift to lower margin newly launched products. In our M2M business gross margins improved relative to Q4 as a result of product cost reductions and good ASP discipline.

In the quarter AT&T, Barnes & Noble and Sprint each contributed greater than 10% of our sales and together these customers represented 46% of sales.

On a GAAP basis operating expenses were $50.8 million and the loss from operations was $4.5 million in the quarter. On a non-GAAP basis operating expenses were $42.3 in the quarter compared to $43.8 million in the fourth quarter of '09.

The decrease of $1.5 million was from lower R&D spending which declined from 14.3% of revenue in Q4 to 12.3% of revenue in Q1. Non-GAAP earnings from operations improved to $4.1 million in the quarter, an increase of $0.4 million compared to Q4 and up $1.9 million over the first quarter of 2009. non-GAAP earnings from operations in Q1 excludes $3.5 million of purchase price amortization, primarily related to Wavecom, $1.7 million of stock based compensation, $1.6 million of restructuring primarily related to the additional headcount reductions and $1.8 million of integration costs, as our ERP conversion project and other systems projects related to the Wavecom integration proceed.

On this slide we provide a summary of the key financial GAAP and non-GAAP metrics compared to our guidance. I previously commented down to the operating income line. Our GAAP results include a loss from other of $3 million. This is comprised of a FX loss of $3.8 million offset by a tax recovery of $0.7 million and non-controlling interests of $100,000. On a GAAP basis other income was nil.

Looking at net earnings in the quarter, the GAAP net loss was $7.5 million or a loss per share of $0.24. On a non-GAAP basis net earnings were $4.1 million and earnings per share were $0.13 in the quarter. Non-GAAP net earnings and EPS were above our guidance of $3.3 million and $0.11 per share respectively. I'd also mention that non-GAAP EBITDA in the first quarter was $9.4 million.

Please note that a complete reconciliation of the GAAP to non-GAAP results is available in the Investor Section of our website for your reference. So overall I think we had a pretty good quarter and we're pleased to deliver results that exceeded our expectations and which show significant improvement year-over-year and sequentially from Q4.

Turning to the balance sheet for a moment, our financial capacity remains strong. We ended the quarter with $122.4 million in cash and short-term investments equivalent to approximately $4 per share. The cash balance is entirely unrestricted and the Company is debt free. Although our cash balance declined in the quarter the decrease was primarily driven by an increase in working capital to support revenue growth. For instance, during Q1 accounts receivable increased by $12 million in the quarter. During the quarter operating activities used $7.9 million in cash, which includes this increase in receivables and capital expenditures were $2.9 million.

Moving to guidance for the second quarter of 2010, we're providing guidance on a non-GAAP basis, which as previously stated excludes stock based compensation expense, acquisition amortization, Wavecom integration costs, restructuring costs, FX gains or losses, tax adjustments and non-controlling interests related to the GAAP adjustments.

In the second quarter of 2010 we expect revenue to grow to between $155 million and $160 million. Non-GAAP earnings from operations are expected to be between $2 million and $4 million and non-GAAP net earnings are expected to be between $1.7 million and $3.6 million, or $0.05 to $0.12 per share. This guidance is based on our expectation that mobile computing revenue grow sequentially while improving AirCard's sell through and new product launches and our expectation that machine-to-machine revenue declined slightly as the sales consumer machine-to-machine products normalizes following initial launch volumes in Q1.

On a consolidated basis we expect gross margins to be between 28% and 29% for the quarter. We expect gross margin in the M2M business to increase. However, we expect this improvement to be offset by a decline in the mobile computing gross margins driven by the launch of new AirCard products that ramp during the quarter.

We also expect non-GAAP operating expenses to be approximately flat in the quarter compared to the first one, compared to Q1.

Finally, please note this guidance also reflects an uncertain macroeconomic environment and is based on current beliefs and assumptions, which are subject to change. Actual results could differ materially from guidance and the risk factors are described in our regulatory filings.

With that, I'd like to turn the call back to Jason for some closing comments.

Thank you, Dave. So to summarize our first quarter of 2010, I believe we had an excellent start to the year. Our financial results were solid and we exceeded both revenue and earnings guidance. We're also experiencing good momentum across all of our lines of business, as evidenced by our revenue growth, new customer design wins, new product launches and improving sell through during the quarter.

Our organic and inorganic investments have resulted in a strong, growing and profitable M2M business that represented 59% of total revenue in the quarter. Our mobile computing business is also well positioned with key operators and OEMs and expected to return to growth in Q2. As a result, we now have a well diversified Company with two solid lines of business, both contributing to our goal of becoming the global leader in wireless solutions for M2M and mobile computing.

We're making good progress on operating expense reductions and continue to drive to our quarterly non-GAAP operating expense target of $40 million and while we're doing this we're growing our top line gaining share and working towards our long-term target business model of 30% gross margin, 20% operating expense and 10% operating margin.

And with that, Operator, we'll open up the line for some questions.

(Operator Instructions). Your first question comes from the line of Spencer Churchill.

I just wanted to drill down a little bit further on the gross margin for the next quarter. You mentioned the mobile computing is going to be down on the new AirCard launches. Is that a one-quarter phenomenon do you think as you're getting those ramped up for the first time and then we could see that go back up in the back half of the year?

Spencer, this is Jason. I'm going to be careful not to say it's strictly limited to one quarter but we do view it as temporary, if that's helpful. You know, we do expect that we'll get back to 30% gross margin over time and yes I do think that our new launches are disproportionately burdened with higher cost of goods during the early ramp phase.

And I might also add to that, Spencer, that the machine-to-machine gross margins are improving and expected to improve in Q2, so we've got some other things going the other way.

And I guess when the Wavecom acquisition was made we were hoping that blended margins would kind of start to increase. They did for a couple quarters and now they're coming back and how would you characterize the long-term outlook now? Is it perhaps a little bit lower than it was when you made the acquisition just because of the strength you're seeing from some of the embedded products and perhaps a little bit of weaker on the AirCard side or how do you -- how have you seen the transition since the acquisition to sort of what we're guiding to for next quarter?

Well, the way I see it is gross margins on our machine-to-machine business are up and, in fact, since we acquire business, acquired Wavecom one year ago, the gross margins coming out of sales from Wavecom products are up as well. They're up about 200 basis points so I think that's gone the way we wanted it to go. Overall machine-to-machine gross margins are strong and, as Dave said, we expect them to get stronger in the current quarter again. And this is really about a mix, a mix phenomenon. We expect a significant jump up in our AirCard revenue, something we got -- revenue that we got criticized for weak revenue last quarter, as you may recall, and we're seeing that snap back in Q2, which I think it overall is a good sign, although that is bringing some negative blending effect to the overall consolidated gross margin.

Okay and just one more thing, on the tier one OEM opportunities that you mentioned I think it's the first time you talked about that in a little while. Is this sort of playing out the way you had expected that the some of the business that was lost two years ago is now coming back up for renewal and you're finding yourself in a better position?

Yes that is playing out as we expected and we've been pretty specific on our progress in that area. We've gotten a couple of nice wins with long-time tier two partners and shipments are building a little bit there and you saw that in the results so sales to mobile computing PC OEMs were up in the quarter, as I indicated, up for the first time in several quarters, probably up for the first time in more than a year. And I think we've got pretty good visibility to getting a -- one or two tier one laptop OEM wins as well. Those we don't think will contribute to the top line, however, until 2011 but it is playing out as we expected.

Great thanks, guys.

Bill Choi.

Just first, is there a raise that you guys actually gave out? I don't know if I missed the gross margins guidance any.

Yes, Bill, you cut out there. What was the question?

Did you actually give a range for gross margins?

Yes we did. In Q2 the guidance implies a range of 28% to 29% consolidated.

Right. Now you said it might last more than a quarter and just want to make sure I understand this a little correctly. You obviously have a new 4G product shipping. Is that largely just due to one product or is it overall category, if you could define the mobile computing gross margin pressure a little further.

Yes I'll be a little bit careful there. It's confined to a couple products, mainly the newer products and, as I indicated often for some period of time following a new product launch those products are unduly burdened with higher cost of goods and that's proving out and we've got some time now I think that we can step through cost reductions but it will take a little time to get up to full ramp and to get the benefit of some of our product cost reductions into the gross margin result.

Right and you've had to step through that as you went from 2G to 3G. I am curious if there's anything a little more unique in 4G that might take shorter or longer time to get costs down versus some of the transitions you've gone through in the past?

No I would view it conceptually the same. There's no significant pluses or minuses driven by 4G.

Okay and then you did mention that you thought Q1 mobile computing sales were somewhat impacted by slower sell through that began in Q4 and then early part of Q1 so did you really see the business pick up towards the end of the quarter that you could point to for your expectations for sequential growth rate in AirCards?

We did yes. We saw a little bit. We saw revenue pick up in March. We saw overall sell through for Q1 actually be above sell through for Q4, which never happens so that was an interesting thing to see and the order book, so between those factors, plus our expected new product launches, that's driving our expectation for growth in the AirCard space.

That's interesting. What do you think inventory levels are? Is it at historical lows and they need to replenish here in the next couple quarters?

You know, I think they're probably where they should be and where they have been over the past several quarters. Operators are continuing to be careful not to be too fat on inventory and I wouldn't characterize them as extraordinarily low when compared to the last few quarters and I wouldn't characterize them as high either. They're probably about where they should be, anywhere from four to six weeks.

One last question just it's good to see Barnes & Noble get to be over a 10% customer here and just given that they just launched a product and started marketing it heavily and there's probably some time to digest it, I am curious if you could at all size how Barnes & Noble compares in terms of relative size versus your other two 10% customers and how quickly you think that NOOK business comes back, how long it takes to digest some of the initial shipments? Thanks.

Sure. Well, they're a 10% customer. We're not going to give you any more granularity than that but no they were a good, very strong contributor in the current quarter and part of that was kind of initial ramp on a new product and new product launch and I think Barnes & Noble is quite pleased with the sales of NOOK and are planning to bring on new channels over time and our view is that's going -- that's probably going to take a little time to get some of the new channels up and on stream and we're obviously very closely watching the sell through trend so that we can respond and meet their demand.

Amir Rozwadowski.

Jason, in discussing the AirCard business I mean certainly it seems as though some of the new product introduction and sell through have given you optimism for sequential growth here in the second quarter. I was wondering if you could talk a bit about how you feel the trend should progress through the course of the year. Obviously we saw sort of a tempering of demand in the fourth quarter of last year but it does seem like you have some new product introductions and momentum working within your favor for at least the duration of this year and I was wondering if you could give a little bit of color there?

Yes I think we're in a share gain position in at least one of our big channels and that's driven by some of the new product launches, the 4G launches, and I think that's going to help us. We'll have to wait and see how sell through goes but clearly we believe that our sales with 4G partners are going to be robust.

And, across the board our key operators are promoting the category pretty hard. We've seen television advertising get switched back on and that generally helps and, like I said, sell through and this is prior to the launch of any additional new 4G products, sell through activity in Q1 was actually a bit better than Q4, which was surprising. So, again, sell through plus new product launches leads us to expect sequential growth. And beyond Q2 tough to tell, Amir, candidly. You know, we'll be watching sell through pretty closely.

Okay and then just if we could talk a bit about sort of the machine-to-machine space, are there particular areas of strength that you're seeing in terms of the vertical markets? Right now, given some of your customer penetration and where you're seeing some of those trends I mean, do you have a sense at least of now how we should think about some of the growth trajectories for those specific vertical markets?

Well, I think we've said a few times we think that the kind of the industrial -- call it the industrial machine-to-machine category, ought to be growing in a healthy environment. It ought to be growing 20% to 25% a year and that's pretty broad based. I think, as we look at individual segments, whether it's automotive or networking or payment or security or fleet management, all of those seem to be in a band of 20% to 25% in terms of what industry analysts expect and we think in a healthy macro environment that's probably not too far off.

We think that we are well positioned broadly in all of those markets and probably particularly well positioned in automotive where we've got an automotive specific product lineup and in a number of new design wins coming on stream over time. So, between [DENSO] and a new auto customer we will be shipping to here shortly, I think that's a particularly interesting segment for us. But, having said that, I think energy has some great macro growth drivers as well, so we think across the board it feels pretty good.

And then on the consumer side of that we view that as interesting opportunities to catch good volume and we've seen that in the eReader category and clearly a number of the products that we have in the product lineup fit the consumer category quite well and we're going continue to chase those opportunities.

That's helpful and then lastly, Jason, we saw an announcement obviously by QUALCOMM, one of your partners in expanding their Gobi platform to the machine-to-machine arena. I was wondering if you could give us some of your thoughts there and are we going to see a replication of the prior challenges with Gobi entering the PC OEM arena or is this -- do you see this as sort of a different trend in terms of how they're positioning the product this time around?

Yes I see that it's a little bit different. My expectation, we certainly don't expect to be competing head to head against QUALCOMM in the machine-to-machine space and that's kind of how it developed in the early stages with PC OEMs and, as we've indicated with PC OEMs, that model has changed and certainly our expectation is that competing directly against QUALCOMM and machine-to-machine is not going to happen.

We're a Gobi licensee. Might we take advantage of Gobi for certain opportunities, that's certainly possible but our expectation right now is our organically developed product lineup is going to be the -- is going to represent the vast majority of our sales into the machine-to-machine segment.

Thank you very much for the incremental color.

Matthew Hoffman.

Dave, Jason, another question for you on the comment you made on the AirCard market because sort of you sound pretty bullish, so you'd already spoken about the lower gross margins and really regard those as part of the mix. Are we really seeing elasticity of demand at these lower price points? I mean, you've brought the price points down on the USB and AirCards widely. Is this a sign that at these lower price points consumers are walking in and wanting the product and there's more promotional dollars available?

I don't think -- it has little to do with hardware pricing really because in most of the volume slots where we participate the hardware has been priced at zero with a two-year commitment for some time, so I think with respect to hardware ASP that has little to do in our view with -- or any change there has little to do with any uptick in demand, so I think probably what's driving the uptick in demand is a stabilizing in the macro environment, a turning up of the promotional efforts on the part of the wireless operators. We're seeing more television advertising again and in the case of us specifically, I think that our expectation, part of our growth expectation, is driven by a share gain expectation in one of our key channels as well.

So you've seen subsidies on AirCard remain relatively constant or are operators really subsidizing less at these points and just taking more in terms of profits?

No I think it's pretty constant.

Okay. Another question, Dave, you did touch on the accounts receivables trend. Look, DSOs were up 20 or more days. Is that a trend that is going to reverse here and is it a sign really that you were just closing business late in the quarter, responding to March demand that Jason was referring to earlier?

Yes, Matt, just a correction on DSOs, they were fairly consistent relative to Q4 so hovering around 50 days. What we saw in the quarter with a growth from receivables I think really reflects two things. One is the business is growing and secondly, the quarter was not sequential so we had more revenue in March that ended up in receivables at the end of the quarter. So I just think that's a healthy use of cash to support a growing business.

Okay and last question, any thought to diversifying your base band and chip supplier base with QUALCOMM coming into your market a little bit? Are you looking at some of the other baseband suppliers out there?

Well, we first of all we view, to be straight on this, we view QUALCOMM as an important partner and I think we've got a great relationship there. It's probably stronger now than it has been in a couple years so they are a good partner, a good supplier. And second of all, we already do have a diversified platform strategy. So all of our 2G products or I should say none of our 2G products, which are a big part of our volume, are QUALCOMM platforms. Most of those use ST-Ericsson platforms and I'll also point out that our USB 305 product that AT&T is selling, branded LaptopConnect Lightning, is a 3G product based on an [ISERA] platform. So, we've got a diversified lineup. Clearly though, QUALCOMM has been our largest partner with respect to 3G products and, like I said, they continue to be a good partner.

Right, thanks guys.

Chris Umiastowski.

Can you guys hear me now? Oh, sorry about that. Okay, so I have a few questions. The M2M market obviously going well, like we alluded to, some of the stuff in the consumer space. How much of the volume in M2M would you say is coming from stuff that could be volatile, based on product cycles in the consumer market, and I would think the NOOK is a good product to put in that category versus some of the stuff you're doing in the automotive segment, where I would think you're probably going to see a bit more quarter-to-quarter stability?

Yes, yes that's a good question and we're not going to -- we're going to be careful not to get too specific here because we do have a big contribution from one of those consumer products companies, Barnes & Noble. So I will say the vast majority of our M2M revenue comes from the, what I'll call the more industrial machine-to-machine markets and we view it the same way you do, Chris, that that is kind of a baseline business that is healthy, growing nicely, has very solid gross margin, but we are chasing these high volume opportunities as well. And to your point, yes they can be volatile but for us it's great leverage because it uses products that we have. It uses a sales team that we have already and it's great incremental business.

Okay, yes I agree. I agree that sounds logical. Now just to be clear, when you say the vast majority, you're talking about Q1 as well?

I'm talking about Q1 as well, yes.

Okay and how high does the number have to be for you to say vast majority?

It's got to be way above 50% than it is.

Okay that's as much pushing as I'll do on that one, thanks.

Chris, I think the important point here is that we view that category really as a portfolio and so we've got many customers and many products and that allows us to take on what might be a bit more of a volatile business because we balance it out with other longer term design wins with our other customers.

Yes I don't think anyone can knock you for going out for the volatile stuff. It's still revenue. Okay, let me ask you another -- I wanted to ask about the USB modem business. We heard some questions about gross margin. What's going on in terms of pricing? I think we know you guys can cost down the products in time, but how is the customer base treating you and your competitors with respect to ASPs?

It's the same as it has been the last few quarters. It continues to be intense from a competitive standpoint and our roster of operator customers we -- they do recognize and pay for our value add, but we have to price competitively. So I don't think that's changed dramatically and interestingly if you look at our AirCard ASPs, as a family, they're actually up in Q1, even though gross margin is down a bit so it's really a cost of goods thing that we need to get our arms around.

Okay and you're confident there's no fundamental change to the business that would stop you from getting costs out this time around?

No, no it might take some time, but I don't think there's any fundamental obstacles there.

Okay, it sounds reasonable to me. The next one I wanted to ask you is about opportunities in form factors. Just understanding your embeddeds in the mobile computed spaces, you say you have notebooks and netbooks and then we've got this emerging category of tablets with the iPad on the scene. I'm kind of wondering a couple of things here. First of all, do you see opportunity in the tablets space with some of the traditional PC guys coming in to compete? And second of all, is this market affecting at all people's perception of demand for eBook readers?

Well the latter part of your question to be determined I think. I think the emergence of iPad, whether or not that's going to cannibalize demand for things like eReaders really remains to be seen, although we have the same thought in the back of our head, right. So we're watching that closely and it's just too early to see if there's any impact there. With respect to opportunities in the tablet space, yes we definitely see opportunities in the tablet space and we're designed into a couple of tablet computers. I wouldn't characterize them as high volume, by the way. We're already designed into a couple of tablet computers and if iPad has significant success in the market, I would expect that there's probably going to be some iPad competitors, who will enter as well, and clearly we would view those manufacturers as good opportunities for our modules.

Okay that's reasonable. And then lastly, I wanted to ask you about the comment you made about expecting some share gain in one of your channels. Are you looking to gain share in a North America channel or an international channel?

It's a North America channel and we've said previously that we expect to launch, much like we launched a 3G, 4G mobile hot spot.

Oh, okay.

We expect to launch a 3G, 4G USB device and it's probably pretty obvious where we have share gain opportunities for that.

Yes, enough said there. Okay and then I think you have answered all my questions so that's it for me. Thanks, guys.

Todd Coupland.

Just following on the 4G, 3G point, you actually finding that the demand for that device is being used for tablets on the Sprint network?

Well, I'll be candid, Todd, are you referring to our Overdrive device, of course? It's hard for us to see through the channel and get clear visibility on the use case for end users, but clearly Sprint is promoting the Overdrive as a connectivity tool for anything that's WiFi enabled and we've certainly done a lot of work technically to make sure a broad array of WiFi enabled devices from iTouches to PlayStations to laptop computers work well with the overdrive system. So I can tell you Sprint is certainly positioning it as a connectivity tool for a broad range of those devices and I'm relatively certain they're having some success in connecting such devices to Overdrive but it's just we don't have clear enough visibility to tell you that's 30% or 20% of the volume. We just don't know.

Okay, I mean there's certainly speculation that unlocked iPads are showing up using this device.

Great.

And then your USB point, I'm assuming you're still talking about the Sprint network. You're not talking about initial LTE deployments?

Yes we will not be deploying LTE devices in the second quarter.

Yes, yes okay, so that's just a different form factor getting to the same point. Okay, and then the last point is, for me, so I understand your target model, 10% operating margins. It doesn't sound like that's happening anytime soon. So, when you see gross margins slipping below 30%, I understand the product maturity point but it is still a reality of your business. New products are going to be coming out on a regular basis I would assume. Is that $40 million OpEx number the right number or are you going to need to re-think that and maybe have another step function down? Maybe just talk to us about your thoughts about that.

Well yes sure, I mean, just doing the math, you assume 30% gross margin and $40 million OpEx. We've got to be pretty far north of $155 million, $160 million to achieve a 10% operating margin. So clearly the $40 million OpEx target, the 30% gross margin target, requires growth to get to the 10% operating margin and clearly that's our preferred path to get there and we believe are competing well in a couple of growth markets and have a path to get to the top line we need. But if we determine along the way that we're not going to get there as soon as we would like, then we have to look at other parts of the P&L, right?

So is your view today that you'll sort of let those product plans play out in 2010 and that's likely. If it is going to be revisited it's likely later 2010, 2011?

Well, I'm not going to give any time frame on when -- well I tell you this, we revisit that thought process approximately once a week so --

We're pretty hawkish on that one.

Yes so that's a daily managing the business thing.

Just for what it's worth, I mean, obviously there's a lot of leverage in your business model and we sort see it every quarter, right? We've seen it for four quarters in a row now, up and down so and --

Right.

Right around that point is -- well, right around that sort of tipping point, I mean if you were down at $38 million nobody would be complaining about, for example, nobody would be complaining about 29% operating margins because you'd be at $0.15 plus for the quarter. So whereas you are at 43 we're at $0.06 to $0.12 and sort of half of that.

No I know. We can do that math. We understand it and believe me we're looking at it very closely and these things are always a balance, right? So, I could tell you today that tomorrow we'll be at $38 million and we can make it happen. However, we may throw a giant speed bump in front of our corporate strategy of leadership in machine-to-machine and mobile computing in doing so. So we've got to balance the tactical early returns against our strategic goals and make sure we're doing the right things, not just short term, which is important, not just short term but also long term.

Yes, yes and take my comments in that context, please.

Sure.

Thanks very much.

There are no further questions at this time. I'll turn the call back over to the presenters.

Great, okay well we will wrap up this call. I want to thank everybody for participating in our Q1 financial results call and, as is typical, management is standing by here in our office in Richmond and be happy to answer any additional questions you may have. And, Jessica, with that we can end the call.

That concludes today's conference call. You may now disconnect.