司亞樂 (SWIR) 2011 Q1 法說會逐字稿

Thank you for participating in the Sierra Wireless first-quarter results conference call. I'd like to introduce your speakers, Jason Cohenour and Dave McLennan.

President and CEO, Jason Cohenour, you may begin your conference.

Thank you, Matt, and good afternoon, everyone. Thank you for joining today's conference call and webcast.

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 website following the call.

Today's agenda is as follows -- I'll first provide a general business update, and then turn the call over to Dave, who will cover the first-quarter 2011 financial performance in detail, as well as guidance for the second-quarter of 2011. I'll then return for some brief summary comments, and Q&A.

Before we get started, Dave will take you through the company's Safe Harbor statement.

Thanks, Jason.

I'd just like to summarize our Safe Harbor statement, which is on slide 2 of the webcast. Certain statements and information in this presentation are not based on historical facts and constitute forward-looking statements within the meaning of applicable securities laws. These statements include our financial guidance summary for Q2 2011, directional commentary for the second half of 2011, and our outlook and business drivers for 2011. Forward-looking statements are provided to help you understand our views of our short-term and longer term prospects. We caution you that forward-looking statements may not be appropriate for other purposes. They represent our current views and may change significantly. Our forward-looking statements are based on a number of material assumptions, including those listed on page 2 of the webcast, which could prove to be significantly incorrect. And our forward-looking statements are subject to substantially -- substantial known and unknown material risks and uncertainties.

Some of our key material risks and uncertainties are listed on page 2 of the webcast deck. I also draw your attention to a longer discussion of our risk factors in our annual information form, and management's discussion analysis which may be found on the CDAR and EDGAR websites, and as well as in our other regulatory filings with the SEC and BC Securities Commission.

This presentation and webcast should also be viewed in conjunction with our press release and with the supplementary information on our website, which provides a complete reconciliation of our GAAP and non-GAAP results.

Thank you, Dave.

We continue to execute on our strategy, and made good progress on a number of business initiatives. However, our financial performance in the first quarter of 2011 was mixed. Q1 revenue was in line with expectations at $144.3 million, down 5% compared to the first quarter of 2010. This year-over-year decline was driven by a significant reduction in sales to Barnes & Noble, which declined from $26.7 million in the first quarter of 2010 to $700,000 in the first quarter of 2011. Excluding sales to Barnes & Noble, revenue in the first quarter increased 15% on a year-over-year basis.

Our in-line revenue performance was offset by lower than expected non-GAAP gross margin of 27.4% in the first quarter. At a high level, component cost reductions took longer than expected during the quarter, and we recorded an unusually high warranty expense related to the AirCard product line. We view these negative gross margin factors as temporary, and expect to see a modest gross margin improvement in the second quarter. As a result of our lower than expected gross margin, we recorded a non-GAAP loss from operations in the first quarter of $3.6 million, which was below our guidance range.

Despite a weaker than expected operational start to 2011, we believe that our strategy is sound and that our execution on strategic initiatives has been strong. By strengthening key aspects of our business, we have created a sustainable leadership position in both the M2M and mobile computing markets. Our product pipeline is strong. Our design win momentum is solid, and we have secured important new channel slots. This progress underpins our expectations for year-over-year growth in revenue and earnings in the second half of this year.

Our strategy is to be a global leader in wireless solutions for both machine-to-machine and mobile computing, two important growth markets in the wireless industry. At M2M, we are the global leader. We are building on our leadership position, while also expanding our role in the M2M value chain. In mobile computing, we are investing in the 4G product cycle. We are focused on driving 4G technology leadership and focused on being the top supplier of mobile broadband devices to key operators, such as AT&T, Sprint and Telstra.

We're leveraging these 4G building blocks to create a market-leading 4G embedded module product line, as well. This 4G product lineup has helped us to earn design wins with tier one PC OEMs, and to be first to market with 4G solutions for key M2M segments, such as networking and automotive. Our ability to maximize leverage across our lines of business, with leading edge technology platforms, global resources and combined supply chain scale, make us unique in the market and provides important competitive advantages. We believe that these competitive advantages and market momentum will drive growth and improving profitability over time.

Our growth and diversification strategy is working. Over the past two years, we have successfully driven both overall revenue growth and significant revenue and customer diversification. Underpinning this remarkable transformation has been tremendous M2M growth of 135% in two years, plus continued technology, scale and investment capacity contributions from mobile computing.

Taking a closer look at our machine-to-machine business, which includes M2M wireless embedded modules, AirLink Intelligent gateways and routers, and the AirVantage M2Mcloud platform, M2M revenue in the first quarter was $72.7 million, down 18% from $88.7 million in the first quarter of 2010. Core M2M revenue, which excludes Barnes & Noble, was up 16% over the same period. Our M2M business is highly diversified, and enjoys strong competitive advantages, which has continued to drive solid design win momentum across various verticals in the first quarter.

Recent M2M design win and product announcements include Hughes Telematics, who's using the AirPrime SL-6087 embedded module combined with our XM GPS module and embedded application framework, to build their In-Drive Telematic solution. EDMI, a smart metering leader, who's using our AirPrime modules in their EWM100 modem that tightly integrates directly with power meters. Numerous 4G LTE design wins, primarily in the networking segment, with companies such as NETGEAR, Cisco and NetCom, who are focused on fixed line replacement and fixed line back-up applications. And we launched the AirLink GX, our next generation advanced M2M gateway with 4G wireless connectivity.

Our AirVantage M2M cloud computing platform also gained significant market traction during the first quarter of 2011. In addition to current customers, we announced agreements with leading operators around the world to integrate their subscription management platforms with AirVantage, and to co-market AirVantage application enablement services to OEMs and solution providers globally. Our new AirVantage partners include AT&T, Verizon, Vodafone and KPN. We have a solid pipeline of similar opportunities and expect to announce additional agreements with other operators in the coming months.

Overall, our long-term outlook for M2M is unchanged. We continue to be bullish, and are seeing growth supported by a broad base of customers and channels. We also continued to invest for the future and, looking forward to full year 2011, still expect our core M2M business, excluding Barnes & Noble, to grow organically at about 15%, on a year-over-year basis.

I'll 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 and tablet manufacturers. In line with our expectations, mobile computing revenue in the first quarter of 2011 was $71.6 million, up 14% year-over-year, and down 14% sequentially. During Q1, we made strong 4G AirCard product development and launch progress. In March, we launched our second generation mobile hot spot with Sprint; the 3G/4G Overdrive Pro. The Overdrive Pro brings important new enhancements and competitive advantages, such as support for eight users and extended Wi-fi range, and has been selling well in Sprint channels. We also introduced our new lineup of LTE AirCard products, including innovative new mobile hot spots and USB devices. Related to our LTE investments, we announced another chapter in our longstanding technology collaboration with Telstra and Ericsson, with each committing to co-develop and launch products in support of Telstra's migration to LTE later this year.

Our 4G AirCard product pipeline is substantial. We continue to have strong channel positions with our key operator partners, and have secured channel slots for the launch of our new 4G mobile hot spots and USB devices. As we look forward, we expect significant sequential growth in our AirCard sales in the second half of 2011, driven by the launch of our new 4G AirCard products, the expected 4G growth cycle, and an expanded footprint with key operators, such as Telstra and AT&T.

We also believe that we are poised for solid second half growth with PC OEMs. We have had steadily growing revenue contribution from our core set of tier two PC OEMs. We have also secured new design wins with additional tier two players, as well as three tier one OEMs, including Lenovo. We have been very business assisting these customers with module integration, and although we have experienced some platform delays, we expect these new design wins to result in ramping volume of shipments of our AirPrime embedded modules, driving significant revenue growth in the second half of 2011.

Dave will now take us through a more detailed look at Q1 results, and guidance for Q2.

Thanks, Jason.

We report our financial results on a US 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, FX gains or losses on certain financial balances, tax adjustments in non-controlling interest related to non-GAAP adjustments.

Looking at the specifics of our Q1 2011 results, revenue was $144.3 million, in line with expectations, and at the high end of our guidance range of $140 million to $145 million. Compared to the first quarter of 2010, revenue was down 5% year-over-year, with higher mobile computing and core M2M sales offset by a large step-down in sales to Barnes & Noble. Excluding sales to Barnes & Noble, revenue in the first quarter increased 15% on a year-over-year basis. In the first quarter of 2011, Sprint and Telstra each accounted for more than 10% of our revenue, and, in aggregate, these two customers represented approximately 25% of total revenue. This compared to three greater than 10% customers in Q1 of 2010, which represented 46% of our revenue. So clearly, we have diversified our revenue base in the last year, and we will continue to do so.

On a non-GAAP basis, Q1 gross margin as a percentage of revenue was 27.4%, down from Q4 GM of 29.3% and below our expectations. While we expected some higher product costs in the quarter on certain products, we believed that these would be offset by lower component costs in other areas. Unfortunately, these component cost reductions are taking longer than expected to realize. In addition, in the first quarter, we incurred unusually high warranty expenses related to the AirCard product line. These factors combined to drive our gross margin in Q1 below our expectations. We view this situation as temporary and expect a modest improvement in gross margin in the second quarter as we begin to realize the benefit of these expected component cost reductions.

Non-GAAP operating expenses were $43.2 million in Q1, flat sequentially from the fourth quarter of 2010, and up on a year-over-year basis from $42.3 million in the first quarter of 2010. Relative to the fourth quarter of 2010, changes in FX rates negatively affected our operating expenses by $400,000 and relative to Q1 2010, negatively affected our OpEx by $900,000. At a high level, we continue to manage OpEx closely and are carefully balancing cost reductions with future growth investments. As a result of the lower than expected gross margin performance, the first quarter of 2011 resulted in a non-GAAP loss from operations of $3.6 million, below our guidance range of break even to a loss of $2.5 million, and down from non-GAAP earnings of $4.1 million in the first quarter of 2010. Also on a non-GAAP basis, net loss was $2.4 million, or a loss of $0.08 per share. Again, below our guidance range and down from net earnings of $4.1 million, or $0.13 a share, in the first quarter of 2010.

Turning to the balance sheet, our financial capacity remains strong. During the quarter, we generated positive cash flow from operations of $1.5 million. Capital expenditures were $2.7 million in Q1, resulting in negative free cash flow of $1 million. Our cash balance at the end of Q1 remained relatively flat from year end at $110.8 million, or roughly $3.55 per share.

Moving on to guidance, we are providing guidance on a non-GAAP basis, which, as previously stated, excludes stock-based compensation expense, acquisition amortization, integration costs, restructuring costs, foreign exchange gains or losses on translation of balance sheet accounts, and tax adjustments. In the second quarter of 2011, we expect revenue to be between $140 million and $145 million. We expect steady year-over-year growth in core machine-to-machine to be offset by some weakness in our AirCard sales during the quarter. A principal driver of the AirCard weakness is an expected change in our business with Clearwire. As a result of Clearwire's evolving retail strategy, and increased focus on cash management, we do not expect to make new sales to Clearwire in the foreseeable future. Our Q1 sales to Clearwire were $8 million.

With respect to the recent natural disaster in Japan, we expect to see some modest impact on our business in Q2. Factory damage has resulted in supply constraints for some components used in certain of our M2M products. We expect these component supply constraints to negatively impact our Q2 revenue by approximately $2 million.

We expect non-GAAP gross margin to improve modestly in Q2 compared to Q1, as we begin to see the impact of expected component cost reductions. And we expect non-GAAP operating expenses to increase modestly on a sequential basis from Q1, mainly as a result of unfavorable FX, which we expect will negatively impact OpEx by a little more than $1 million compared to Q1. As a result, we expect non-GAAP loss from operations to be between $3 million and $5 million, and non-GAAP net loss to be between $2.2 million and $3.8 million, or a loss per share of $0.07 to $0.12.

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 risk factors are described in our regulatory filings.

Back to you, Jason.

Thanks, Dave.

As a result of significant shifts in our ecosystem, affecting primarily our mobile computing business, we are clearly off to a slower start in 2011 than expected. These ecosystem shifts have led to lower revenue with certain customers, such as Clearwire, shifts in the launch of important new products, and even some short-term supply chain constraints. In spite of these short-term challenges, we are continuing to drive our strategy forward. We are leveraging our advantages and differentiation to build a clear leadership position in the growing M2M market. Strong year-over-year revenue growth in core M2M, design win momentum in key markets and new product launches provide important proof points of our surging market leadership.

Our investments in expanding our position in the M2M value chain are also yielding important results, as more mobile operators and OEMs are choosing to partner with us and to leverage our AirVantage cloud services to help drive M2M market growth. Our leading edge 4G development efforts have resulted in important new product launches, an extremely robust product pipeline, launch commitments with strategic operators, and design wins with leading PC and networking OEMs. I believe these are important building blocks to creating a sustainable leadership position in both M2M and mobile computing, and to driving growth and diversification in the second half of 2011 and beyond. In the second half, we expect to see solid year-over-year revenue growth leading to second half year-over-year earnings growth.

And Matt, this concludes our prepared remarks. You can now open the line for questions.

(Operator Instructions)

Your first question comes from the line of Amir Rozwadowski with Barclay Capital. Your line is open.

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

Hello, Amir.

I was wondering if we could talk a bit more about your outlook. It seems, based on your highlighted comments, the you know, excluding Clearwire, and some of the component constraints that you had highlighted, it does seem as though that you are expecting sort of sequential growth in the other areas of your business. I was wondering if you would talk a bit more about where that growth should be coming from, and should we start to expect some additional launches or ramp up of your LTE products on the mobile computing side, the PC OEM side. I was wondering if you could give a little bit more finite color there.

Let me provide more color there.

So, the Clearwire head wind is clear. That is going from $8 million to zero, sequentially. So a significant head wind there.

And we are still working with our operator customers through this 4G transition. 4G launches have moved slightly to the right, as a result of network readiness issues. So you know, we are certainly ready to launch, but that's moved a bit to the right and we expect a much stronger contribution from 4G AirCard sales in the second half, than we are expecting in Q2. So that is a bit of a push, I would call it.

And similarly, in PC OEM land, there were some, I'll call them platform delays, which moved expected laptop platform launches a bit to the right as well. So the growth drivers are intact. They have just pushed to the right a bit, is our view of the situation right now.

With respect to M2M, you know, our expectations are for continued solid year-over-year growth.

Okay. Okay. That's very helpful, Jason.

And then, if we think about some of the impacts on your gross margin this quarter, it seems as though you are expecting an incremental lift in gross margins. When do you think, I mean are we still at some point, targeting a recovery to 30% gross margins? Is that still within the framework of how you are thinking or what are the considerations there?

So we are not back ago way from our long-term operating model of 30% gross margin and 10% operating margin. We are going to have to step through to get there. We are expecting to see some incremental recovery here in Q2 as we are able to take advantage, not a full quarter's worth advantage, but we are going to start to take advantage of lower component costs. That's going to help. And as we look out farther in the year, we are going to be careful not to give gross margin guidance, but we would certainly hope that volume is an important driver of gross margin as revenue grows as well.

So, bit of a recovery in Q2, and we are not backing away from our long-term model of 30.

Great. That's helpful.

And then lastly, if I may, do you have a breakdown of what the PC OEM business was versus your M2M embedded business?

Yes. PC OEM was about $7 million. So that was up year-over-year, and roughly flat sequentially. As I said, our expectation for that is to grow significantly, as we launch laptop platforms with our PC OEM customers. And embedded module revenue in machine-to-machine, about $62 million, Dave?

That's right. It's $58 million in Q1.

Perfect. Thank you very much for the incremental color.

Thanks, Amir.

Your next question comes from the line of Mike Walkley with Canaccord Genuity. Your line is open.

Oh, great. Thank you.

Jason, I just want to dig in a little more on the LTE push. Obviously, new networks create risk in terms of timing of launch. Can you maybe share some color on how your products, specifically, are performing in certification and just overall confidence, giving the recent push that the ramp starts maybe in the Q3 time frame?

I think we feel really good about our readiness, about our readiness. We've had some -- we've already done launches on very similar platforms for HSPA dual carrier networks. So it wasn't a huge leap for us to develop and have solid LTE products.

I would characterize the push there as primarily a network readiness push, and I would also characterize it as not a big one. So I think the good news there is we have high confidence, we'll be ready. And we also have pretty high confidence that our launch partners are very motivated, and moving as hard as they can.

Okay. Great.

And just a little color on the component supply shortages. Can you share with us what type of components they are and if you think it poses any risk into your second half of the year recovery? Are these type of components that could be in short supply more than just Q2?

Yes, I think you know at the start of Q2, the situation was the outlook was much worse than it is today. You know, so the ops team has worked very hard to both qualify replacement parts, as well as to secure supply of the parts that were affected, including going to distribution, as an example. So you know, we've whittled that down. By the way, the types of components, primarily passive components, things like inductors. Not major platform components like base band chip sets, but you know, more of the lower cost commodity items. And we've got that down to very -- to a very manageable list of components now. And you know, we can't say with absolute certainty that it won't impact us in the second half. But we are getting more confident each day.

Okay. Thanks. One last question, I'll pass it on.

Jason, just a high level question on the machine-to-machine market. Can you talk just about kind of your new carrier agreement that you have talked about on the call? And just our overall view of the competitive dynamics in the industry, any change in recent quarters, with more companies trying to come into this market?

And then just more into the numbers, with the $700,000 for Barnes & Noble, is that about the rate we should think about that going forward? Or does it get a little better from there? Just trying to get some clarity on the M2M growth.

Maybe I'll take the Barnes & Noble one first. That one is tough to predict, Mike, candidly. While we have continuity there, from a design win relationship, it is pretty clear Barnes & Noble has kind of deemphasized 3G connectivity for the Nook. I think if that heats up again, we are very well positioned to take advantage of it. But we've got modest expectations there.

We respect to core M2M, you know, well first of all, I think Q1 was strong performance. Down a little bit sequentially, but that's, you know, a bit of seasonality there. Design win momentum with the embedded modules has been very strong. So you know, I continue to be very bullish on the M2M embedded module space.

AirLink, you know, a bit of a slow start here in Q1. But we are optimistic that's going to come back much stronger in the second half. And very excited about the AirVantage momentum. Now this is a, you know, this is a play where we are connecting to existing operator subscription management platforms. So there is some technical integration required, which I think kind of makes us quite a sticky partner. There is a co-marketing relationship in place, so that we jointly go out to the market with these operators and attract OEMs to use the application enablement tools of AirVantage. So you know, pretty excited about that.

Okay. Great.

Thank you very much, Jason.

Sure.

Your next question comes from the line of Mike Abramsky with RBC Capital Markets. Your line is open.

Thanks very much.

Could you just maybe help us understand what's the source and nature of your comfort and confidence regarding the 4G product ramp, maybe? And also color about expected growth or decline in AirCard and M2M. What are the pending catalysts that are going to affirm for you, over the next few weeks, that that ramp is going to materialize the way that you are hoping?

Well you know, I -- our view is, Mike, that it's timing. You know, I think that our expectation is when players like AT&T, players like Telstra, launch high speed 4G services that you know, number one, they are going to put a lot of promotional effort behind the launch of those services. And secondly, we've already been awarded those channel slots. And thirdly, we are expanding our product footprint within those channels. So as opposed to shipping you know, one type of product to AT&T and Telstra, we expect fully to be shipping two products, USB devices and mobile hot spots. So of course you know, at the end of the day, those are all good indicators.

At the end of the day, we need to have our partners have successful launches. And we need to have them be successful with sell through. So certainly, that is our expectation. I suppose at the end of the day, time will tell. They've got to be successful in the market. We are certainly doing everything we can. You know, we are ready from a product readiness standpoint. We've got the slots secured, the launch slots secured. We've got more products shipping into those channels. So from there, it is going to be really about sell through and promotion.

In those launches, how significant are cards going to be versus handsets versus other, you know, things that are going to be pushing, tablets, et cetera, in your view, with regard to anticipated impact from those launches?

You mean potential cannibalization from things like tethered phones and tablets and things?

Yes. But also in terms of carrier attention and support.

Yes, I know. We feel good about that. You know, I think all things mobile broadband are getting a lot of attention. You know, clearly some of our partners, competitors in the market, like Verizon, are pushing 4G devices like ours quite hard. And I would fully expect that our partners would have a competitive response to that. When they have, you know, when they have networks that are on equal footing, from a technology, speed, and user experience standpoint.

And my belief is that, you know, given the strength of our position in our partners' channels, and given what we believe are aggressive promotional campaigns building, that we should be a beneficiary of that.

And on the cost side, there's been obviously some variability in your cost structure around both one-time and structural items. And just wondering, again, you don't give margin guidance, appreciate that. But can you give just us some insight into what the risks are to your costs through this expected product ramp?

Yes. I think from an OpEx perspective, Mike -- and it's Dave speaking. You know, certainly Q1 and Q2 tend to be, we are seeing them being higher OpEx quarters, lots of trade show activity and product launch activity, and marketing as well as product development and launch activity in R&D. So that is certainly a driver of OpEx in the first half.

You know, we are also seeing a negative impact on our OpEx as a result of foreign exchange as well, with our Canadian dollar denominating and Euro dollar denominating expenses being translated back into US dollars. But I think, you know, as you see from our results, we are really managing OpEx carefully, because we have been able to absorb, if not all, most of those FX impacts.

Sorry, go ahead.

Is there anything different about the nature of the overall LTE launch, that might be, cause you to incur some costs that may otherwise not have been present during say ,the launch of 3G, stuff that you haven't had already experienced that the carriers might encounter, or that you might encounter?

Pretty similar profile to other development programs. Usually toward the end of a program there is, you know, additional costs with third parties for certification and things like that. And that is, you know, those are costs we're incurring right now, and we have incorporated those into our guidance.

So nothing unusual about the LTE programs.

Sorry, go ahead.

You think you have pretty good visibility, is what you are saying, into what those costs related to those launches will be?

Yes, we do.

Thank you. Thanks very much.

Okay. Thanks, Mike.

Your next question comes from the line of Peter Misek with Jefferies & Co. Your line is open.

Great. Thank you. This is Jason taking the call for Peter.

Looking at your dongles versus mobile hot spots right now, any kind of color on the split between the two, and what you expect going forward?

And secondly, with the growth of mobile phones being used as hot spots, anything you can do to try and combat that? Thank you.

Sure. Sure, thanks.

With respect to what I'll call AirCard mix, you know, right now, we are shipping mobile hot spot products to a single customer, Sprint. And we are shipping USB products to a number of customers. So we, so one dynamic is we expect that to change, mid-year and into the second half, where we will be shipping multiple products, mobile hot spots and USB devices to multiple partners, multiple carrier partners. So clearly, for us, that's going to shift the mix a bit, favoring mobile hot spots. Now, how that, what that percentage mix is by the end of the year, you know, we can't share that with you now. We certainly have a view of that, but that's going to change over time as we see sell through. So you know, we expect both of those product categories will be significant and important contributors.

With respect to phone as a hot spot, you know, we've got an optimistic lens on that and we've got a negative lens on that. The optimistic lens is, you know, being able to tether your phone. First of all, people have been able to tether their phone since the beginning of time, so it is not actually a new source of competition. But clearly, it is getting a bit more elegant, a bit easier. So the positive lens on that is, that, we believe, will raise overall awareness of mobile broadband. And we believe that devices like USBs and mobile hot spots, that are you know, application-specific devices, deliver a superior experience as well, in terms of speed and usability. So we think overall awareness floor will rise, and those customers who use a phone as a hot spot and are dissatisfied are probably more likely to buy a USB device or a mobile hot spot.

The negative lens, of course is that demand for our kind of products gets cannibalized over time. And so far, you know, we don't see that in a significant way. But of course that is a potential disruptive threat we have to keep an eye on. I will add that operators are motivated to sell devices like USBs and mobile hot spots, because it's a second subscriber, and that's a key metric for measuring success, and we believe a more profitable higher RPU subscriber. So I think there is good motivation on the part of the operator to continue to promote our product category as well.

Great. Thank you.

Sure.

Your next question comes from the line of Matt McKee with Morgan Keegan. Your line is open.

Hello, guys. This is Matt, on behalf of Tavis McCourt.

I was wondering if you could provide a little more color into the second half, particularly whether the growth would be weighted in Q3 or Q4? And how much of it relies on 4G versus embedded modules?

Well, unfortunately we can't. We can't give you that level of precision.

But you know, certainly we --our expectations for, is for a significant step up, to be clear, Matt. And that's you know, 4G, and we have mentioned the drivers before. So it's underlying steady M2M growth, the launch of 4G AirCard products into multiple channels and not just single devices, I think that is an important nuance there. It's not just an LTE USB device to AT&T, as an example. We expect to be shipping hot spots and USB devices. And thirdly, the ramp up of PC OEM platforms.

And to give that a little bit of context, we are getting $7 million a quarter right now from tier two PC OEMs. Nice, steady contribution there. And we are going from two or three of those guys to probably four or five tier two players, plus three tier one players. So pretty big shift in the number of PC OEMs, times some number of new platforms. So we think that could be a pretty significant driver of revenue growth as well.

So those are the drivers. But to give you a level of precision on that right now would be premature.

Great. Thanks.

Sure.

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

Hello, guys.

Just wondering if you could walk us through what would be driving the core M2M revenue this year? I'm just wondering how much is related to design wins that are already ramped up versus those that are expected to ramp sometime this year?

Sera, it's a bit of a combination.

With M2M, we get design wins almost every, every week of varying sizes. So it's certainly a combination of expected ramp with existing OEMs, plus layering on top. Revenue going into new design wins. And it's a constant process of layering on those new design wins. So in the back half, we do expect that some revenue contribution will come from new design wins. As I indicated earlier too, we are also expecting a bit of a step up in our sales of AirLink products, based on the strength of our sales funnel that we see there.

With respect to segments, the segments, the core machine-to-machine segments, that are kind of the key drivers right now, continue to be automotive, networking and energy. And you know, without giving it too much precision on that, you know, those three segments are probably contributing between 35% and 40% of our M2M revenue.

Okay. Great.

In the past you mentioned automotive wins take a few years before it ramps up to full production. Do you have any of those previously won automotive wins that are going to be ramping up this year?

We do. But you are seeing it in our results right now. DENSO continues to be a key contributor. So that is not new. Auto Leave, who ships to Peugeot, is a new contributor, starting late last year. They're another large player. And TomTom, for Renault, is another key contributor. Those are the three biggest automotive runners right now.

And probably late in the year, over the course of the year, we expect to layer on some smaller design wins, And late in the year, we do expect to see the start of contribution from some of our, what we expect to be bigger automotive design wins.

Okay. Great. That is what I was trying to get at. Thank you.

And for the target of getting to year-over-year growth in the second half, is that for just earnings, or for revenues and earnings?

For revenue and earnings.

Okay.

And just last question, I think I saw on an article from Barnes & Noble saying they are unveiling a new e-book later this month. Do you know if that is a wi-fi only version or if that's a 3G version?

Well, I think I need to be careful there. We -- I think to the extent that they choose to emphasize 3G, we would be a beneficiary of that. But so far, you know, so far this year, as an example, the focus has been to, has been really to emphasize wi-fi, as opposed to multi-mode devices. So at that, if that emphasis changes, we are standing by to be a beneficiary. But we have pretty controlled expectations of that right now.

Okay. Thank you.

Sure.

(Operator instructions)

Your next question comes from the line of Kevin Dede with Brigantine. Your line is open.

Hello, Jason and Dave. Congrats on the top line.

Thanks, Kevin.

A little clarification on Japan, Jason, if you don't mind indulging me. I apologize, I didn't put all the pieces together.

I understand you might see a $2 million top line hiccup, but also understand that you have sufficiently filled in alternative source supply on mostly passive components, such as inductors, I think you mentioned. But you are also expecting the gross margin to improve sequentially. I just want to make sure that I've got that all in context. And also that you are not expecting the issues there to continue beyond the second quarter?

Right. Yes, no, I think you've got all that right, and maybe just adding a bit of clarity.

You know, our expected $2 million constraint is embedded in our guidance. And with respect to component price reductions, you know, I think it is an intuitive question. Hey, if there is a shortage of supply, how can you expect to get component price reductions? And these have been pre-negotiated. So we, unfortunately, we weren't able to take advantage, as early as we thought, of these pre-negotiated price reductions. So we are starting to see the impact of that now, and that should continue to layer in over the course of Q2. So in our view, it is not anti-gravity at work there. They are pre-negotiated component price reductions, in spite of the supply constraints we are seeing on certain components out of Japan.

Great. Okay.

And then, the last bit of my commentary, just on an extending beyond the June time frame. You are okay with things sort of snapping back status quo?

We are. I mean, that is our expectation right now. We could be surprised. You know, it is certainly J-- Japan's a developing situation, right? But I think you know, I think we've got our arms around it. And it did take you know, some significant amount of engineering work as well, because we did have to qualify some replacement parts, in order to keep continuity of supply. But I think we've got our arms around it.

Of course, it's a dynamic situation, but we certainly feel better now than we did, you know, in late March.

Right, right, right. Okay. Thanks for that, Jason.

Just on -- help me make sure I remembered this correctly, as well. When we finished up the December call, you thought that you'd see year-over-year growth this year, and do you still think that's the case? Or no?

Well, I think, yes. We were, I think what we said was we expected year-over-year revenue and earnings growth, on a full-year basis. You know, I think clearly we've stepped back from year-over-year full year earnings growth, in light of the -- in light of the loss situation in Q1 and expected loss situation in Q2. So we've dug ourselves a hole there, and we've, you know, it is going to be tough to make that a year-over-year full year earnings growth story.

However, looking at the second half, our expectation is for, in the second half, year-over-year revenue and earnings growth.

Great. Okay, I just wanted to make sure I had that straight.

Thanks so much for indulging me, Jason.

Yes, you bet.

Your next question comes from the line of Mike Abramsky with RBC Capital Markets. Your line is open.

Oh, yes. Just wanted to circle back, just on mobile hot spot. Jason, can you just give us some sense of how you are positioning yourself against things like the Verizon wi-fi, et cetera, on features like power, battery life, connection, reliability. Not looking for a product review, I just would like to get a sense of, based on what you are building, how you see yourself competing, as you enter the market subsequent to these other hot spots.

Sure. I think one key thing to keep in mind, Mike, is that when we launch our mobile hot spots, with our operator partners, they are first-to-market launches, right? First-to-market with the new AirLink technology.

So, I think that's kind of that's an important thing to keep in mind. It is not as though we have high expectations that we are going to break the doors down at Verizon and start shipping them a boat load of mobile hot spots, because ours is so far superior.

And that's perfectly fair. What I just was asking is, clearly you'll be compared to those.

We will.

Getting to that, we are focused on usability. So as an example, the Overdrive Pro supports up to eight users and competitors support up to five users. We are focused on power management, something you said. We are also focused on ease of use. So you know those are kind of the, oh and performance, things like wi-fi range. So we think we have better power management, broader wi-fi range, we think we are easier to use, and we can support more users.

When I say things like easier to use, that is a bit abstract. We have innovated things like a user display on the device, right? So you know what is actually happening on the device. You know what your 4G signal strength is. You know if you are connected. You know how many users are connected. You know, some of those basic operating parameters. We have also done a ton of work on the web user interface. So when you use your laptop to connect over wi-fi to our hot spots, I think we've done a very good job creating a pretty sexy web-based user interface there. So that's what I mean about, when I say ease of use.

Okay.

Mike, just to add, in the case of the Overdrive Pro, that is our second generation product. So you know, we have had the first generation market for over a year, and certainly have learned a lot about the performance characteristics, and have come out with a second generation new and improved product, which launched ahead of our competitors first generation.

Okay.

And then just separately from Japan, you are not seeing an impact on M2M from Toyota?

Great point. We are seeing a little bit of an impact. It was, we felt, probably a little too small to mention in the script. But we are seeing a modest impact there, because of the production capacity reductions at Toyota. But it's modest.

Okay. Thanks very much.

You bet.

And there are no further questions at this time. I would turn the call back over to you, Mr. Cohenour.

Okay. Great.

Well, everybody, thank you very much for joining today's call. As usual, management will be available here at our corporate headquarters here in Richmond, if you have follow-up questions.

Thanks very much for participating. Thank you. Good-bye, now.

This concludes today's --