司亞樂 (SWIR) 2010 Q3 法說會逐字稿

Thank you for participating in the Sierra Wireless third quarter 2010 results conference call. I would like to introduce your speakers, Jason Cohenour and Dave McLennan.

Thank you Chrissy, and good afternoon everyone. Thank you for joining today's conference call and web cast. With me today on the call is Dave McLennan, the company's CFO. As a reminder, today's presentation is being webcast and will be available on our web site following the call. Today's agenda is as follows. I will first provide a general business update, and then turn the call over to Dave, who will cover third quarter financial performance, as well as guidance for the fourth quarter. I will then return for some brief summary comments and questions and answers. As a reminder, today's web cast and call is subject to the company's Safe Harbor statement. We are not going to read the statement into the record, the statement is currently being displayed on the web cast on slide number two. I will now pause for a moment for everyone to read it.

This presentation should also be viewed in conjunction with our press release and with the supplementary information on our web site which provides a complete reconciliation of our GAAP and non-GAAP results. I will begin with a brief summary of third quarter highlights. Overall, I'm very pleased to announce that our business generated great results in the third quarter. Revenue in the quarter was $172.7 million, up 27% year-over-year, and up 9% sequentially, and represented another record revenue quarter for the Company.

Our year-over-year revenue growth was broad based, with both M2M and mobile computing business lines delivering strong year-over-year gains. Non-GAAP operating expenses were down again, to $41.3 million as a result of continued focus on cost management. Together our strong topline and lower costs, resulted in higher than expected non-GAAP earnings of $0.21 per share in the third quarter, significantly above our guidance range of $0.15 to $0.17 cents.

In M2M, our strategic investments over the past four years are paying off. We've achieved the number one market share position globally, we are delivering new differentiated products and securing new design wins in key segments. And we are also delivering on our promise to expand our position in the M2M value chain and to become a prominent M2M solutions and services player.

In mobile computing, we are well positioned to continue capturing 4G growth. We have strong channel positions, a robust product portfolio on pipeline and important new design wins. Finally in Q3 we announced new business unit based organization structure, designed to sharpen our focus on customers and further accelerate profitable growth. Looking at our M2M business results in more detail, which, as a reminder, includes revenue from sales of our AirPrime Embedded Modules to M2M customers, sales of our AirLink Intelligent Gateways and revenue from our AirVantage Services Platform.

In Q3, M2M revenue was $76.1 million, representing 42% year-over-year growth. With this growth we solidly hold the number one global market share position in M2M and we continue to build on that leadership in Q3. We were awarded multiple OEM design wins in the quarter, including large opportunities with key customers in the automotive, payment, networking, energy, and consumer segments. We launched the AR Series, a new line of wireless modules specifically designed for automotive applications including telematics, infotainment and navigation Developed from the ground up to be automotive grade, the AR Series meets rigorous automotive quality and reliability requirements and includes broad support for 2G and 3G air interfaces. There is no other product line like it in the industry, and we've just established a new standard for the market. Customer reception of the AR Series has been excellent, and we have secured multiple design wins for the product line.

We had another record revenue quarter for our high margin AirLink, M2M, Intelligent Gateways and Routers, including growing sales in Europe and Asia. While winning more AirLink business, we also stepped up our end to end solutions activity, integrating and bundling AirLink Gateways with our AirVantage Solutions and Services platform. On the subject of AirVantage, we announced that TELUS, here in Canada, has selected our AirVantage Services platform to help them provision, manage, and deploy M2M solutions on their network. This win is a significant milestone for our solutions and services business as it provides an important demonstration of the readiness of our M2M software as a service platform to support millions of connected devices. Looking forward to the fourth quarter, we expect our M2M business to grow sequentially from the third quarter, driven by broad based strength across our M2M segments and customers. I will now move to our mobile computing business, which includes revenue from sales of our AirCard Mobile Broadband Devices as well as revenue from sales of our AirPrime Embedded Modules to PC OEMs.

We had an exceptional quarter in mobile computing. Our mobile computing revenue in the third quarter was $96.6 million, up 18% year-over-year. Our growth was driven by continued strong demand for our dual mode EVDO WiMAX products including the overdrive mobile hot spot as well as the AirCard 250U which was launched late in Q2 by Sprint and Clear. We also saw strong revenue contribution and significant new product launch activity in our HSPA Plus product lines. Overall, we believe we are well positioned to capture the mobile broadband opportunity. Driven by continued strong channel positions at key carriers, recent new product launches, a strong product pipeline and new PC OEM design wins. In the last few months alone we launched a new device with AT&T, called Shockwave, the successor to the highly successful Lightning product. Supporting speeds of up to 21 mega bits per second on HSPA Plus networks Shockwave is the highest performing device in the AT&T product portfolio and is now being promoted in all channels.

We also commenced volume shipments of the world's first commercial 42 mega bits per second, dual carrier HSPA Plus device to Telstra. Telstra has now done a full commercial launch of the product in all channels, where it is receiving significant promotional support. We also announced our first LTE products, a series of embedded modules covering all LTE technology and banding combinations globally. We've also secured our first design wins with these products with both PC OEMs and M2M customers. Looking forward, we see continued profitable opportunities in mobile computing. We've been awarded new channel slots for yet to be launched 4G devices at key operator partners and we now have design wins with three tier one PC OEMs. We expect these channel awards and design wins to contribute significantly to our 2011 results.

Shorter term we expect to see a slight sequential decline in our AirCard sales in Q4. While we still believe sell through and our channel positions remain strong, we recently experienced an unexpectedly high degree of focus on year end inventory and cash management with one of our larger AirCard customers. As a result, we now expect AirCard sales in Q4 to be lower than previously thought. With that I'm going to pass it to Dave to cover Q3 results and Q4 guidance.

Thank you Jason, and good afternoon everyone. 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 cost, foreign exchange gains or losses, tax adjustments and noncontrolling interest related to non-GAAP financial adjustments. Q3 was a very strong quarter for us, with record revenue of $172.7 million, representing an increase of 27% over Q3 2009 and up 9% compared to Q2 2010.

As Jason stated earlier in the call, mobile computing contributed $96.6 million in Q3. That's up 18% from Q3 2009 and up 27% sequentially from Q2. Machine to machine, contributed $76.1 million in Q3. That's up 42% from Q3 2009, and down 9% on a sequential basis from Q2. This sequential decline was expected, reflecting lower consumer product module sales. We continue to benefit from the diversification of our business with our revenue being nicely balanced between mobile computing, which contributed 56% of our revenue in Q3 and M2M, which contributed 44%. Another benefit of a diversification, is reduced customer concentration. During the third quarter of 2010 our top two customers being Sprint and Clear, contributed 31% of our revenue, compared to a year earlier when your two top customers contributed 43% of our revenue.

Moving on to our operating performance. Starting with gross margin, non-GAAP gross margin was 28.4% in the third quarter of 2010, compared to 35.9% in Q3 '09, and 29% in Q2 '10. This sequential decline from Q2 '10 in gross margin was expected and was driven primarily by a higher mix of AirCard sales in the quarter. With respect to operating expenses, we continue to manage our cost carefully as evidenced by our restructuring announcement in September, affecting approximately 6% of our staff, and which will be largely complete by the end of this year. Non-GAAP OpEx in the third quarter was $41.3 million, that's down from $43.6 million a year earlier and down sequentially from the $41.7 million we incurred in Q2.

Non-GAAP OpEx excludes $3.4 million of purchase price amortization, primarily from the Wavecom acquisition, integration costs of $700,000, stock compensation of a $1.5 million, and restructuring costs associated with our September reorg announcement of $4.3 million, which includes $500,000 of stock comp. Higher revenue, combined with operating expense discipline, has improved our profitability. Non-GAAP earnings from operations during the third quarter was $7.8 million, up from $5.1 million a year earlier, a 53% increase and up sequentially from $4.7 million in Q2. In similarly non-GAAP earnings per share increased to $0.21 from $0.18 a year earlier, and was also up sequentially from $0.14 in Q2.

Turning to the balance sheet, our financial capacity remains strong. We ended the quarter with $105 million in cash and short-term investments. That's equivalent to approximately $3.38 per share, and the company is debt free. As we grow our business, we are consuming some cash. During Q3 cash flow from operations utilized $10.7 million, primarily a result of working capital requirements as we carried a higher level of receivables at the end of the quarter, and the use of our balance sheet to build inventory of components which are in tight supply to protect our supply chain. We also used $2.8 million of cash in the quarter to fund capital expenditures, mainly for development tools and test equipment.

Summarizing the quarter, this slide presents key GAAP and non-GAAP financial metrics compared to our guidance. Revenue at $172.7 million was at the high end of our guidance range, gross margin at 28.4% on a non-GAAP basis, was slightly better than our expectations. On a GAAP basis, loss from operations was $2.2 million, and on a non-GAAP basis we had earnings from operations of $7.8 million, which was better than guidance range of $5.4 million to $6.4 million, and which resulted in an operating margin of 4.5%. With respect to net earnings, our GAAP net earnings were $700,000 or $0.02 per share, which includes a foreign exchange gain of $2.4 million and income tax recovery of $500,000. On a non-GAAP basis, net earnings were $6.5 million or $0.21 cents per share, well above our guidance range of $4.5 million to $5.4 million or $0.15 to $0.17 per share. The non-GAAP net earnings exclude the FX gain of $2.4 million and non-GAAP income tax was $1.3 million which excludes $1.4 million of income tax adjustments. Please note a complete reconciliation of GAAP and non-GAAP results is available in the investor information section of our web site. So, overall we are very pleased with these results which exceeded our expectations and which show solid year-over-year and sequential improvement.

Moving on to guidance for the fourth quarter of 2010, we are providing guidance on a non-GAAP basis, which, as previously stated, excludes stock based compensation expense, acquisition amortization, Wavecom integration costs, restructuring costs, foreign exchange gains or losses, tax adjustments and noncontrolling interests related non-GAAP adjustments. In the fourth quarter of 2010 we expect revenue to be between $170 million and $175 million. Non-GAAP earnings from operations are expected to be between $8 million and $9 million, and non-GAAP net earnings are expected to be between $6.8 million and $7.6 million or $0.22 to $0.24 per share.

Relative to the third quarter, the Company expects sequential growth in machine to machine revenue as a result of broad based demand and a sequential decline in mobile computing revenue as a result of lower AirCard sales . We expect gross margin percentage to increase in Q4 to approximately 29%, as a result of the anticipated sales mix change and an expected reduction in product costs for some of our AirCard products. We anticipate that OpEx will be slightly higher in Q4, driven by new product certification launch costs, as well as FX impact as the euro and Canadian dollar have strengthened against the US dollar. The net result of which is an expected modest increase in net earnings compared to the third quarter.

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 our risk factors are described in our regulatory filings. Now I would like to turn the call back to Jason for some closing

Thank you Dave. So, to summarize, Q3 of 2010 was an excellent quarter, featuring record revenue and better than expected earnings. Our mobile computing business delivered a great comeback and strong year-over-year growth achieving its highest revenue level since 2008. Despite a softer outlook for Q4 we are bullish on our mobile computing prospects for 2011, and believe that we are well positioned for profitable growth with continued strong channel positions, an excellent 4G product pipeline and design wins with leading PC OEMs. In M2M, we have achieved global market share leadership in this rapidly emerging space and we're continuing to build on our success. Our M2M franchise is not only the biggest and continuing to grow, it's also fundamentally differentiated from our competition on many dimensions. In addition to having the industry's broadest product line and strongest global footprint, we are also now delivering on our promise to take more of the value chain, with important solutions and services wins with partners like Telus. Looking forward, we expect to leverage our leadership position and market advantages to continue to drive profitable M2M growth in Q4 of this year, in 2011, and beyond. Overall, we continue to be excited about our business, our market position, and the opportunities that lay ahead. We are confident that we have the right team, the right structure and a strong business platform to leverage, as we continue to drive growth and improving profitability. So, with that,Chrissy, we will open up the line for some questions.

(Operator Instructions) Your first question comes from the line of Mike Walkley of Canaccord Genuity.

Good afternoon. hank you for taking the questions, this is Matt Ramsey on for Mike.

Hello, Matt.

Hello. First of all, Jason can you give a little bit more detail and color on your position in the M2M market. Which segments in particular give you the best visibility currently, is it consumer products like the Nook, is it networking with all your recent announcements, are there longer term contracts or a combination of multiple programs. We're just trying to get a better understanding of which segment of your broad portfolio should drive 2011 growth and how this could impact margins?

Well I would have to say it's quite broad based Matt. We are pretty pleased that our recent M2M wins have covered a number of our segments, and I rattled off a bunch of them during the con call. Now, with respect to automotive in particular, those tend to be very long sales cycles, long integration cycles and long product cycles. So, if you look out several years, it's probably the segment where we have the best visibility and having won the design wins that we have to date, our view is, in three years we've got pretty much all the design wins we need to put together a very nicely growing automotive business and obviously we expect to add to those design wins. In consumer, we are doing well, we've - as you know we've continued to sell through to Barnes and Noble for the Nook product. I'm pleased to say that we now expect to have continuity with Nook and its successor products at least through 2011 and in addition to that we have won a couple of other new consumer devices that we think we will be launching in 2011. So it is quite broad based. On the networking side good things there and we see demand for high speed AirLinks, HSPA Plus and LTE in particular. We've secured some new design wins there for new air interface technologies which we expect to launch soon with those networking partners. So the take away there is a highly diversified customer base in machine to machine, and I think we are loading up pretty nicely on design wins.

Thank you for the additional color. Another question is with Sprint CEO just indicating really strong overdrive sales due to the pairing with the iPad, can you update us on your business trends with Sprint, and maybe your future position with them. Do you anticipate increasing business with Sprint?

We had a very strong quarter with Sprint. Our expectation looking into the future is that we will continue to have strong business with Sprint. I will say we probably have an unnaturally high channel share at Sprint. I would love to continue to keep channel share of not too far off of 100% that's probably unrealistic. But none the less, as we look into the future, I fully expect that we will continue to have a very strong channel share position there.

Great, thank you for that. One question for Dave on the model with Wavecom integration complete and it seems like a good path to earnings in 2011. Can you help us with modeling your longer term pro forma tax rate and also with LTE potentially driving improved mix of mobile computing, can you update us on potential impacts to growth and operating margin targets?

Starting with the tax rate, Matt, I would expect based on our profitability forecast, that we would be around 20% for 2011 in terms of tax rate to use in your model. In terms of our target model for the business on a consolidated basis we are still very much focused on gross margin of 30% and operating margin of approximately 10%.

Okay great, Thank you for that. One more quick question if I could for Jason. On the earnings call last week, Novatel indicated much stronger visibility in to embedded module sales with laptops. Can you add a little bit more color on your earlier comments about LTE embedded modem connectivity and, I guess what do you think that impact on your model would be going forward?

Sure, so we have had design win success with laptop OEMs. For the last couple of years we have been selling primarily to a core set of very good tier two laptop OEM customers. As we have indicated in earlier calls, the ecosystem has shifted to our favor and the favor of players like Novatel such that we expect to be supplying tier one laptop OEMs, starting in 2011 and that's not limited to LTE by the way. It includes LTE but is not limited to LTE. So we've got a good roster of design wins with three tier ones as I indicated. We expect those are going to be be significant contributors to 2011. Now, If we are more successful there than we expect, that's going to be a very good thing for operating margins it will probably compress gross margins a little bit. So we have to see how mix shakes out there but clearly it's going to be a bigger factor in 2011 than it was in 2010.

Alright, great. Thank you guys for taking my questions, have great day.

You bet.

Your next question comes from the line of Amir Rozadowski from Barclays Capital.

Thank you very much. Good afternoon Jason and Dave.

Hello.

Jason, I was wondering if we could focus a bit on some of the near term challenges you highlighted with your mobile computing business. It seems that you had highlighted some inventory and cash management issues. Is that something that you expect to continue have you seen less support for your products at that carrier?

You know, we've -- it's an unfortunate and frustrating situation but our view is that, that carrier demand is very strong for our products. But that particular carrier is very focused on other business dimensions in the short-term. And we are certainly hopeful and expecting that the near term impediments will be removed, but we don't know the timing of the removal of those impediments right now. I want to be careful there out of respect for this particular customer.

Sure, sure. Have you seen any changes in the competitive environment? I know we've seen some newer entries into the US market for example and I'm wording if that maybe playing a factor here?

No I think I know what you are referring to. No, that's not our view, Amir. I'm sure you are probably referring to the Huawei launch at AT&T, and our view there is Shockwave, the recently launched product there, is going to do quite well and our expectations on the sales of that product are for - actually for growth, compared to the previous quarter. It's our view that Shockwave is the featured product in the AT&T portfolio and is getting a lot of promotional attention. So, pretty bullish on that product in general and bullish on our channel position, our relative channel position there.

That's very helpful Jason, and I was wondering if you could talk to us a bit more about how you see, sort of, the longer term trajectory of the mobile computing business. Obviously you have seen some traction on the PC OEM side and notably some potential wins in 2011, but we seem to see fluctuations or variability on the adapter side and I was just - in how you are looking at the business how are you sort of managing the business for either growth or how should we consider that?

You know our mobile computing business we are managing to on a very focused basis, so we are focused on our core set of customers. We are not doing, AirCards for all. And we are focused on driving strong profitability out of that business, Amir, it's an important contributor to our capacity to drive our diversification and growth in other areas such as M2M. So, we are managing that business for profitability but we are also managing it to it take full advantage of the opportunities that our core set of operators are providing. So, very focused investment, is the way I'd characterize it and our plan is in those core operator channels to continue to invest in them, and to continue to lead in those channels and if the products that are created as a result of those focused efforts are attractive to other operators and we see those opportunities as profitable, then we will pursue them but we will pursue them carefully. With respect to PC OEMs that's a new opportunity, or a returning opportunity. I guess is a better way to put it. We are investing there. That's a leveraged investment. As we develop our 4G AirCards from a product standpoint it's not a giant step to have embedded modules for 4G applications as well. And then the real effort there is sales integration and launch support. So we are investing to that degree because we think that's going to be a good contributor to overall operating margin in 2011.

This is Dave, I would just like to add that because of our diversification efforts as well, we are better able to absorb fluctuations in that part of our business because the other part of our business, machine to machine, just has different business metrics around it. While, yes, we have variability in one part, I think we are better able to absorb that and just have better quality earnings and cash flow as a result.

Your next question comes from the line of Paul Coster from J.P. Morgan.

Thank you for taking my questions. Quickly on the PC side, you said that the ecosystem seems to be favoring you now at tier one level, can you just elaborate upon that? What exactly has changed there?

Well, the big change there Pau,l has been a change in approach to the PC OEM industry by Qualcomm. In the previous couple of year, Qualcomm was a direct supplier more of a direct supplier into the space, not leaving a lot of room in the ecosystem for players like us. And Qualcomm's approach has now changed such that we are teaming with Qualcomm to go in - to go get design wins with both tier two and tier one laptop OEMs as they back away from being a direct supplier and are enabling other ecosystem players like us, to play the critical role in actually bringing the products to market and bringing the OEMs to market.

Sounds encouraging. When you win this business, at the tier one, is it on a product level, product line basis on a regional level, is it exclusive or can it be dual sourced or all of the above?

It's really all of the above. It's certainly not unusual to see dual sourcing. Some of our PC OEMs buy only from us but it's certainly not unusual to be in a in dual sourced situation. Often that is driven by specific geographical requirements as an example. So, you know where a LTE implementation is critical, we might be in a better position to win that business than some other suppliers, but if HSPA Plus is okay in a certain market, then a cost leader like Ericsson might be in a better position. So, very often, those module and supplier selections are geographically driven.

Got it. Should we expect more restructuring expenses go in the fourth quarter and into next year? We will have some additional restructuring expenses in the fourth quarter, Paul, and they would be related to the September announcement that we made. But they will be much smaller than the 4.3 that we incurred in the third quarter. And then we should be done, we shouldn't see any more restructuring in 2011?

That's correct.

And then a last question. You said that you are number one in the M2M market, and I have no reason to second guess that. I'm just wondering what your sources might be in making that claim and also, whom you see as the main competitors, or is it very fragmented and then difficult to identify.

It's actually - with respect to the top few players, it's pretty concentrated. Top of the list is us and second is Centurion. Centurion has since spinning off of Siemens, has been a privately owned company, but recently bought buy Gemalto, a public company. We have some pretty good financial data as the result of that transaction, Paul. It is our own internal information on our own M2M business which we report on publicly, combined with clarity from Gemalto, which is now public information on Centurion's revenue run rate. So, based on that, it was a pretty easy conclusion to put ourselves in the number one spot.

Great. Thank you very much indeed.

Sure.

Your next question comes from the line of Chris Umiastowski from TD Newcrest.

Thank you guys. I wanted to ask, starting with you Jason, the tablet market was something you eluded to in the last conference call, where you were hoping to secure a design win, and on this call I noticed you mentioned new consumer products coming up for 2011. Is there any correlation there? What's going on in the tablet market?

Well, those two comments are not correlated, but with respect to pad and tablet activity, yes, we're plugged into a number of opportunities and that looks like it could be a very exciting space. So, we're competing hard to get some design wins there, and I think we're well positioned to secure some of them.

Okay, so nothing happened yet, is the take away, right?

I think with respect to the large opportunities on our radar, that's correct. We don't have any design wins to report.

And, I guess along that - I don't want to plan too far ahead here, but I do want to just think about the table market as a lower ASP market than the laptop computer market, and I'm just wondering if you think there is a sustainable place for module benders in the tablet market, or do you think it's going to be more like the smartphone segment where, you were in there for a little bit, but you knew it wasn't sustainable.

I think that's an excellent question, and I quite candidly, that's - the ecosystem kind of has to play out here for us. I think given some of the requirements that we're seeing, in particular for leading edge air interface technologies, that puts players like us in a pretty strong position if in fact it ends up being a key product requirement. Yes, longer term, as you said, they are lower ASP devices and does that result in an ecosystem squeeze where a module play is not the preferred approach. Maybe, you know, we'll just have to see. I think the opportunities that we see now, look pretty attractive, we're going to pursue them, and we're going to focus on building our position there and keeping a position. And if the ecosystem determines over the course of years that it's not a module play it's a design on the board play, then you know, we'll step away and stop investing. We're being pretty practical about it.

Okay, that makes sense. Sounds very reasonable. The other question I wanted to ask you was about the laptop OEM wins. I think last quarter it was two tier one wins, now you are saying three. So, is that correct, it was incremental up by one in the quarter?

That's correct. Okay, and just to make sure definitions are clear to people, when you say tier one wins, how many tier one players out there do you consider there to be? I consider there to be five or six.

That helps a lot, I appreciate that. What kind of volume shipment estimates do you think might be reasonable in 2011 in the notebook space from these three new customers?

Well, you know, I'm going to be careful with that one Chris because it's looking out pretty far. I think maybe just talking about timing. I think that these - I think we will see first half launches as the result of some of these wins, but our view is, in terms of more substantial revenue contribution, it's probably in the back half of the year. With respect to volumes, the only data point I'll give you is when we were fully in the embedded module business for PC OEMs in 2008 we hit a revenue run rate of $25 million a quarter. So, you know, some factors have changed. ASPs are probably down a little bit. Volume might be up a little bit. So, you know, when we were competing effectively in that business in 2008 it was a $100 million run rate business. So, could it be a $100 million run rate business again? Maybe. It's certainly not a crazy idea.

So, obviously volumes would be up, prices would be down and those might have balanced each other?

Exactly. That's really helpful in terms of how to think about it. Last question, just a AirCard question I think I always ask you one about this business, I will ask maybe a slightly different version of it this time. It just seems to me that there are big players like Huawei out there and they're winning business all over the world and they don't have as high end products as you do, clearly. but if that trend continues my worry, and I'm wondering if it resonates at all with you, how long can Sierra Wireless continue to just focus on it's core set of carrier customers until the volume advantage from some of its competitors is overwhelming? That's a fair question. We - obviously that's been an investor overhang probably in our business too. So we - couple of things about the AirCard business. First of all, in the core customers we have, they actually really value the stuff that we bring. Right. High performance, first to AirLink, high quality, high reliability, great channel support. They value that. They tell us that everyday. So, we're going to - we think it's a fairly safe bet to continue to invest in that core set of customers. Now, will we be - will we have an unsustainable will Huawei as an example, have unsustainable scale advantage against us? You know don't forget we have got an M2M business that's producing into the millions of units, so we are not going to match Huawei's cost of goods, but our business in totality is driving 10 million units a year and that is not - that's not low volume and that does give a player like us significant scale when we go to procure parts and cut deals with our contract manufacturers. So I think the gap between us and the big chinese players is, on pure manufactured product cost, is probably not as big as you think.

Now, there may be some irrational pricing and business models with some of those players that exacerbates that situation, but that's crazy economics over time you'd like to think that just doesn't work even for a business like Huawei's. We are going to be careful, Chris our investments are focused and because players like Huawei have done what they've done in markets like Europe we are lasering in where our investments should go. And like I said earlier we are not going AirCards for all. Because if we made proactive investments in markets where we know it's not a favorable competitive situation that would be a bad investment. We think it's a good investment to make in our core customers. Plus don't forget the AirCard business feeds our M2M business quite nicely with respect to leading edge AirLink technology modules.

Okay. That makes perfect sense. Appreciate all the details Jason that was really helpful.

Sure.

Your next question comes from the line of Sera Kim from GMP Securities.

Good evening. I was just wondering did Q3 include some initial channel field for the Shockwave product and just wondering if Q4 will reflect a continued ramp. I just want to get a sense on if it was later in the quarter shift or happened throughout Q3 or middle and to the end of Q3?

Shockwave, if it was a contributor,r it was a small contributor in Q3.

Okay.

And we expect it to be a more significant contributor in Q4.

Okay. Great, thank you. In terms of - how many 10% customers did you have in the quarter?

Sera, this is Dave, we had two customers two 10% customers.

Okay, so Clear was a 10% customer then.

Yes, Sprint and Clear were our two 10% customers.

Okay.

It totaled to about 31% of sales.

Okay. Great. Just also wondering if you can provide an update on the component supply situation? Did that impact any of the guidance for Q4 at all or was it just purely because of the cash management and inventory issues.

I would really point to the latter factors primarily. I mean you could probably draw an indirect connection between supply constraints early in Q3 and a less than stellar demand picture in Q4. But really the main factor there is as I stated earlier, it's inventory and cash management from one of our larger AirCard customers. Supply has improved it was tough. So in general on supply, supply was tough in the beginning of Q3. Supply was stronger by the end of Q3. Memory in particular, has gotten a bit better, although we are still fighting fire drills on a daily basis across a broad range of components ranging from PCBs to power management, to plastic. We are not completely through the supply chain constraints although the key one, memory, which had been our nemesis for several quarters, seems to have normalized.

Great. In terms - earlier you talked about long sales cycle, and long product cycles for the automotive market in the M2M business. What about some of the other ones? I would imagine the consumer side is a little bit quicker on that front and is quicker to ramp up. Some of the other verticals that you guys play in, can you just talk about how quickly it takes or how long it takes to get design wins to ramp up and how it varies from vertical to vertical?

Yes. That would be a long conversation because we focused ten verticals, but you are right in our assumption that it does vary, between those segments. Automotive is probably on the extreme side in terms of length of sales cycle, integration cycle and product cycle. By the time you get a design win with an automotive player it's probably two years before that product gets launched. And then that product is probably in market for four or five years. Conversely, consumer is the other end of the spectrum,and you're right, those product cycles can be, those product cycles are - well, integration can be less than a year, so you know, as short as nine months, and then product cycles can be significantly shorter, like a year. So those are - they tend to be high volume, quick to ramp, and then on to the next new generation a year later. That's why winning continuity with a player like Barnes and Noble is pretty key. They drive some nice volume and we have been able to maintain continuity there now for a couple of generations of Nook.

So is every vertical different? When you talk about broad based demand and a number of different design wins across all your different segments, how do I know what will be reflected in 2011 and which will be reflected more into 2014?

Well, that's a good question. When we speak about demand, we are really speaking about visibility to revenue. When we speak about design wins, we are really speaking about revenue that will happen at some point in the future. Now, the challenge on those design wins and trying to time them, we'll work on giving some better visibility there, because I think it's an excellent point, quite candidly, and trying to lay that out over - what design wins mean in each segment and how they layer on top of each other over time. But as you can appreciate very diverse customer base, lots of segment , it's tough to do that without doing a lot of up front

Okay, great. Thank you a lot.

Sure.

Your next question comes from the line of Mike Abramsky, RBC Capital Market.

Thank you very much. Do you expect that you will still see in your transition to M2M over time that AirCards will become a flat revenue business given declining ASPs versus higher volumes and M2M will become your growth engine? How do you think that we will start to see visibility to that and timing to that?

Well, yes. I think we do think about AirCard as AirCard and mobile computing as a slower growth business because of the focused approach we are taking to the market. And we do look at M2M as more of a higher growth business over time. So I think you characterize that pretty accurately. So, slow growth and higher growth. And how that mix plays out over time, is still kind of early to tell, but you know , M2M is depending on the strength of the mobile computing business from quarter to quarter, M2M is already close to 50% of our business. So my expectation is that over time it will be a large - represent a larger and larger percentage of the overall

So does that kind of 50% become 75% in a year? Is that the way we should kind of think about it?

I don't think it's going to happen that fast it's not going to happen that fast, Mike.

Okay. But does the rising mix of M2M suggest higher gross margins or will there be a mix of consumer M2M like Nook at lower gross margins? How does that flow in to the shift? The gross margin impact.

Generally speaking it should have a favorable mix impact to gross margin percentage.

Why is is that?

Well, it's because it's a fundamentally higher gross margin business.

Okay, so you are not expecting some dilution from consumer M2M, to gross margins?

That's a factor, but it still results in a higher gross margin percentage.

Than AirCards is what you are saying?

Than mobile computing.

Okay, I understand. And regarding PC OEMs, can you give us a little more color on the number of platform devices the wins involved? Is it - is the form factor traditional laptops or I know you got sort of some questions about this, but any more color you can give us on that?

Well in terms of number of platforms we don't have that data yet because we are a little too early as compared to product launch, but our expectation is that it will be multiple platforms with each of those OEMs and mainly traditional laptop platforms by the way, across a number of different classes of platforms. Ranging from consumer to enterprise. We also expect there to be some net books mixed in as well. But with respect to the PC OEM design wins that we have referred to none of those to my knowledge are pad design wins those are different and new opportunities we continue to work.

Does that appear to you broader than in '08 in terms of PC OEM now?

I think it could be. In '08 it was still kind of a early days for embedded 3G connectivity in laptops and now it's gotten, it hasn't fully covered the spectrum yet but it's certainly closer to the table stakes under the spectrum today than it was in 2008.

Okay. And then the inventory adjustment not to beat a dead horse, but was this something that you thought might be going on for other vendors is there some change that they took across the board or do you think it was restricted to yourself?

You know, I want to be careful there. I think it was a decision to manage cash tightly and to sell what they had whether it was from us or from others until such time as they don't have to manage as cash tightly.

Do you think that will continue through the holidays?

I think it will. That is factored into our guidance.

That's it, thank you very much.

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

Good evening everyone. Just on the Q4 inventory adjustment. How much below your expectations is this? If you could give us a ballpark on that?

It's about $10 million.

Okay. And the $10 million would be consistent with what you had talked about I guess two or three months ago where good visibility in Q3, qualitatively felt good about Q4, now this is a little bit of a rug move that wasn't anticipated when you made those comments I guess?

Correct.

And would you say everything else is sort of as planned with the exception of this? Relative to that prior commentary?

I would, yes but materially aligned with our expectations, yes.

Okay. Then I think back then you had also talked about even visibility into Q1 and I got all the points about slower ramps on the PC, they got to get up and running et cetera to have an impact later in 2011. But I think the comments, when you talked about visibility, you also included less seasonality into Q1. I'm wondering what your thoughts are on that at this point?

Well, so I think we just demonstrated if we get too far ahead of ourselves we can make mistakes. So I'm going to be careful on that and avoid the question.

So, that's certainly fair I understand. Should we expect typical seasonality in 2011 including Q1? Is there any reason why you shouldn't see some rollover after the Christmas holidays?

We will probably experience some seasonality impact. Again, kind of early to tell but I would expect it.

Okay, last question. So last year in Q4 the smartphone promotions sort of sucked some oxygen out of the room with respect to some demand for your products. I know AT&T is promoting Shockwave and Overdrive is doing well et cetera. What is your thinking this year? I mean because we've certainly seen very hot smartphone numbers from the US market and I'm just wondering if that is a potential risk again going into Q4 this year?

I don't know if it's a risk it's probably an impact. Right? Clearly there is - where promotional dollars are spent can have a pretty significant impact on our business. So I think our expectations for promotional activities are factored into our guidance and probably doesn't include aggressive national TV ad campaigns.

Okay, like you had, I guess, summer of 2009.

Right. Or earlier this year even.

Or earlier this year as well. Okay. One more question if I could. When do you expect Nook to start to impact your business?

Probably first half of next year.

Okay. And what kind of expectation should we be having with all the tablets that are coming out? Is there some rethinking going on along those lines in terms of how well this type of product can sell as the market crowds up a little bit?

You know it's a - you mean Nook?

Yes.

Yes. Well, so a couple of factors there. We've - it's -- don't get me wrong, it's very good business for us but the revenue for Nook has come down dramatically since Q1, right. So, still continues to be a strong contributor, but remember Nook was a 10% customer couple of quarters ago, right, So that's definitely changed. It's driven by a couple of factors. One is I would say, specific to the Nook, there is Wi-Fi versions and there is versions - Wi-Fi only versions and there's versions that have both Wi-Fi and 3G. So, that was a new development over the course of the year so certainly that has resulted in some cannibalization of the Wi-Fi 3G device and then the second factor that you are alluding to is the popularity of pads and is that cannibalistic? I would imagine it's got to be, right. So, to what degree it's impacting overall demand for the ebook category? I can't - it's tough for me to comment on an exact percentage impact but the impact is definitely there. I think that's factored into our current expectations with respect to Nook and other ebook readers.

Right, yes, Clearly you have your eyes open with all that out there now.

Definitely.

Great. Thank you very much.

You're welcome.

Next question comes from the line of James Moore from Morgan Joseph.

Hello guys. Thank you for taking my call. This is Jim Moore for Ilya. Just a quick question everything else has been pretty much answered. The cash and cash equivalence is kind of been creeping down slowly for the last few quarters, wondering when we can expect that to stabilize and do you guys have any plans for your cash, that you'd like to share, in the near term?

This is Dave here. One of the big drivers of our cash consumption over the last several quarters has really been working capital requirements. Particularly on the receivable side and the inventory side. I wouldn't expect us to have the same sort of receivables dynamic that we had in Q3 for this quarter Q4 but certainly we will continue to use cash with some selective inventory purchases on components. So I think for the next quarter or two you should expect some modest consumption of cash.

Okay. Thank you very much. Good luck.

Thank you. Operator we will take one more question.

There are no further questions in queue at this time.

Okay. Thank you very much everybody for joining today's call and as usual, management is available here in our Richmond, BC headquarters for follow on questions should you have any. Thank you very much.