司亞樂 (SWIR) 2011 Q2 法說會逐字稿

Thank you for participating in the Sierra Wireless second quarter results conference call. I'd like to introduce your speaker, Jason Cohenour.

Thank you, Alicia, 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 second quarter 2011 financial performance in detail as well as guidance for the third quarter of 2011. I will then return for some brief summary comments and Q&A, but first Dave will read a summary of the Company's Safe Harbor Statement.

Thanks, Jason and good afternoon, everyone. I'll start with a brief summary of our Safe Harbor Statement which is found on page 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 the third quarter and commentary on our outlook and business drivers for the remainder of 2011. Forward-looking statements are provided to help you understand our views of our short 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 substantial known and unknown material risks and uncertainties. Some of these key material risks and uncertainties are also listed on page 2 of the webcast deck. I'll draw your attention to our longer discussion of our risk factors in our annual information form and Management Discussion and Analysis which may be found on SEDAR and EDGAR as well as our other regulatory filings with the SEC and the 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. Results for the second quarter of 2011 were roughly in line with our expectations. Q2 revenue of $139.9 million was at the low end of our guidance range and represents a year-over-year decline of 12% compared to the second quarter of 2010. This year-over-year decline was principally driven by the loss of revenue from Barnes & Noble and Clearwire, who together accounted for nearly $25 million in revenue in Q2 of 2010, compared to $0 in Q2 of 2011. The revenue decline from these 2 customers was partially offset by steady year-over-year growth in our core M2M business of 14% as well as significant growth in revenue from PC OEMs.

As expected, non-GAAP gross margin improved to 28% in the second quarter compared to 27.4% in the first quarter of 2011. Non-GAAP operating expenses improved significantly to $40 million down $3.2 million from the first quarter of 2011. Our sequential decline in operating expenses was better than expected and was driven primarily by an intense focus on cost management combined with lower new product development and launch costs. Our improved gross margin combined with lower than expected operating expenses lead to a non-GAAP loss from operations of $800,000 better than our guidance range of a loss from operations of between $3 million and $5 million.

Notwithstanding a slower start than expected to 2011, we believe that our Company strategy is sound and that our execution on strategic initiatives continues to be strong. We're continuing to build on our leading market share in M2M while also expanding our position in the M2M value chain. In mobile computing, our platform launches with PC OEMs are beginning to ramp. And our new 4G LTE AirCard products are ready for launch this summer with leading operators. Despite some PC platform and AirCard product launch delays relative to our expectations, we believe our fundamental growth drivers are still firmly intact. Specifically, steady core M2M growth, new 4G LTE AirCard launches, and ramping volume with PC OEMs. These drivers underpin our expectations for significant revenue and earnings growth in the second half of 2011.

Before getting into our review of our business lines, I'll touch briefly on our efforts in LTE. We believe that our 4G LTE Product Development efforts have us well-positioned with key customers and channels, and as products prepare to launch, we're building momentum. On June 8, Rogers Wireless announced that Sierra Wireless would be providing the LTE Rocket Stick USB device for launch on their new LTE network, first in Ottawa, which has since been launched, and then across Canada later this year. On July 12, AT&T announced plans to launch their first LTE devices, the Mobile Hotspot Elevate 4G and the USB Connect Momentum 4G, both from Sierra Wireless, putting us in a clear leading position with AT&T as they prepare to launch LTE service in several markets this summer.

On August 2, we announced full certification and technical approval of our LTE embedded modules on both Verizon and AT&T, the first device manufacturer to achieve this milestone. And since early in the year, we've been very busy collaborating with customers and partners such as Cisco, Netgear, Harmon, PC OEMs on 4G enabled solutions. We expect to see more 4G LTE product and customer launches in the coming months in both our mobile computing and M2M lines of business, and view these launches as important revenue growth drivers.

So, taking a closer look at our mobile computing business, which includes revenue from the sales of our AirCard mobile broadband devices as well as revenue from sales of our AirPrime embedded modules to PC OEMs and tablet manufacturers. Revenue in the second quarter of 2011 was $66 million, down 13% year-over-year and down 8% sequentially. Revenue from sales of AirPrime embedded modules to PC OEMs continued to ramp and reached $11.9 million in the second quarter of 2011, up 126% compared to the second quarter of 2010 and up 76% sequentially from Q1.

Our gains with PC OEMs, however, did not offset weaker sales of AirCard products. Revenue from AirCards was down 17% Q1 compared to Q1, driven by a loss of revenue from Clearwire, combined with other operator customers preparing to transition to our new 4G LTE AirCards. Despite a soft Q2 for AirCards, we believe that we're well positioned for growth in the second half of 2011 with new 4G LTE AirCards set to launch this summer and an expectation of expanding share in key operator channels.

At Telstra, we recently started shipments of the AirCard 753-S, the dual carrier HSPA+ Mobile Hotspot, and also continue to have success in the channel with the AirCard 312-U USB device. At Sprint, our dual mode WiMAX EVDO products, specifically the Overdrive Pro Mobile Hotspot and AirCard 250-U USB device continued to deliver solid sell-through. As mentioned, we're gearing up for 2 very important LTE product launches with AT&T this summer. Overall, we continue to expect significant sequential growth in our mobile computing business in the second half of 2011, underpinned by new 4G AirCard launches and continued revenue growth with PC OEMs.

Moving to our machine to machine business, which includes AirPrime embedded modules for M2M, AirLink Intelligent gateways and routers, and the AirVantage M2M cloud platform, revenue in the second quarter was $73.9 million, down 12% from $83.6 million in the second quarter of 2010. However, core M2M revenue, excluding Barnes & Noble was up 14% on a year-over-year basis. So, in our view,Q2 was another strong quarter in M2M. Overall, we're pleased with our operational performance in M2M, and continue to make strong progress on strategic initiatives as well, building on our leadership position, and expanding our role in the value chain.

Reaffirming our leadership position, ABI Research recently published its 2010 M2M market report, declaring Sierra Wireless the number one global market share player in M2M embedded modules. We've successfully built an M2M business that is highly diversified, with strong competitive advantages, which we expect to drive continued design win momentum. Recently we've achieved new M2M design wins across many verticals, with particular success in automotive, energy, networking, and payment. Examples include Verifone, who has integrated an AirLink gateway into a bus information and payment system for the New York MTA; growing automotive demand with existing customers like Peugeot and DENSO, as well as new design wins with leading European, North American and Asian car brands; and EDMI, a leader in smart metering and long-time Sierra customer who has integrated a Next Generation Sierra Wireless embedded module solution directly into their latest power meter platform.

We also continued to invest in expanding our M2M product portfolio, in addition to our new LTE AirPrime embedded modules, we recently launched the AirLink GX400, our next generation platform for M2M gateways. This device family is now available on both Verizon and Sprint, and across Europe, and is fully upgradeable to LTE. The new GX is also fully integrated with our recently-launched AirLink Management Services, a packaged device Management service built on top of our AirVantage platform.

Our AirVantage M2M cloud computing platform also continues to experience significant market traction. We've already announced integration and market collaboration arrangements with key operators such as AT&T, KPN, Telanor, Verizon and Vodafone, and we expect to have our AirVantage platform integrated with over 10 operators by the end of the year. We also have a solid pipeline of OEM customers who are planning to leverage the AirVantage platform to accelerate their solution development and deployment and to manage their remote assets.

Overall our long term outlook for machine to machine remains positive. We continue to be bullish on the market and are seeing solid growth, supported by a broad base of customers and channels. We're also investing for the future, and looking forward we expect to continue to experience steady revenue growth in this key market. Dave will now take us through a more detailed look at the Q2 results and guidance for the third quarter.

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, integration cost, restructuring cost, FX gains or losses on certain financial balances, certain tax adjustments, and non-controlling interest related to non-GAAP adjustments. Looking at the specifics of our second quarter 2011 results, revenue was $139.9 million, roughly in line with the expectations and at the low end of our guidance range of $140 million to $145 million.

Compared to the second quarter of 2010, revenue was down 12% year-over-year. Higher core M2M sales, which were up 14%, and significant growth in PC OEM module sales was offset by a loss of revenue to both Barnes & Noble and Clearwire, who combined, contributed $25 million in revenue in Q2 2010 compared to $0 in Q2 2011. In the second quarter of 2011 our M2M business accounted for 53% of total sales while our mobile computing business accounted for 47% of total sales. Sprint was the only customer who accounted for more than 10% of our total revenue in the quarter, representing 15%. Compared to 3 10% customers, and greater than 10% customers, in Q2 2010; who represented at that time, 40% of revenue. As our M2M business has grown, we have diversified our revenue base over the last 2 years, and expect this revenue diversification trend to continue over the long term.

Second quarter non-GAAP gross margin as a percentage of revenue was 28%, up from Q1 gross margin of 27.4%. This was in line with our expectations, as we continue to drive product cost reductions. Non-GAAP operating expenses were $40 million, down $3.2 million sequentially from $43.2 million in the first quarter of 2011, and down on a year-over-year basis from $41.7 million in the second quarter of 2010. The sequential decline relative to the first quarter of 2011 was driven primarily -- was a result of lower new product development and launch costs, which were driven by a combination of cost savings and some timing of expenses related to product launch delays. During the quarter, we also continue to have an intense focus on cost reductions.

As a result, our non-GAAP loss from operations of $800,000 was better than our guidance range of a loss from operations of $3 million to $5 million, but down from our non-GAAP earnings from operations of $4.7 million in the second quarter 2010. Also on a non-GAAP basis, the net loss in the quarter was $1 million or a loss of $0.03 per share, again better than our guidance range of a loss of $0.07 to $0.12 per share, but down from net earnings of $4.4 million or $0.14 per share in Q2 of 2010.

Turning to the balance sheet. Our financial capacity remains strong. During the quarter we generated cash flow from operations of $17.2 million. Other cash expenditures during the quarter totaled $8.8 million including CapEx of $7.8 million. This resulted in net cash generation during the quarter of $8.4 million and bringing our cash balance at the end of the second quarter to $119.2 million, up from $110.8 at the end of Q1. Our cash balance equates to $3.81 of cash per share.

With respect to working capital, we built a significant inventory position during the quarter to support new 4G product launches. This has resulted in an increase in inventory from $21 million at the end of the first quarter to $42 million at the end of June. This inventory is somewhat higher than expected as a result of the delays we were experiencing in 4G product launches. Based on our expectations of launching new 4G products in Q3, we will utilize this inventory in the coming quarters.

Moving on to guidance. We are providing guidance on a non-GAAP basis, which is previously stated excludes stock-based compensation expense, acquisition amortization, integration costs, restructuring costs, FX gains or losses, and certain tax adjustments. In the third quarter of 2011, we expect revenue to be about, to be between $150 million and $155 million. We expect steady year-over-year growth in our machine to machine business excluding Barnes & Noble, and we expect strong sequential growth in mobile computing, driven primarily by new 4G LTE product launches.

In the third quarter, we expect non-GAAP gross margin to decrease modestly compared to the second quarter due to product mix shift toward mobile computing, partially offset by product cost reductions. However, we are not realizing the full impact of these product cost reductions as quickly as we had expected, due to launch delays and resulting lower volumes. Finally, we expect non-GAAP operating expenses to increase modestly on a sequential basis assuming constant FX, mainly due to product launch costs, we expect to incur in the third quarter. As a result, we expect non-GAAP earnings from operations to be between $1 million and $2 million and non-GAAP net earnings to be between $800,000 and $1.6 million, or diluted earnings per share of $0.03 to $0.05.

Despite 4G product launch delays, our growth drivers remain intact, namely steady core M2M growth, new 4G LTE AirCard launches, LTE AirCard launches and ramping volume with PC OEMs. These factors are expected to generate good sequential revenue growth in the second half; however, we are no longer expecting to show growth on a year-over-year basis in the second half. 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, as I said, our risk factors are described in our filings. With that, I'll pass it over to you, Jason to sum up.

Thanks, Dave. So, as expected we are off to a slow start, stating the obvious, in 2011. The loss of revenue from 2 large customers, specifically Clear and B&N and launch delays on new 4G products and PC OEM platforms have certainly constrained our ability to grow as quickly as we had hoped.

In spite of these short-term challenges, however, we're continuing to drive our strategy forward. We're leveraging our advantages and differentiation to build a clear leadership position in the growing M2M market. Steady year-over-year revenue growth and core M2M, design win momentum in key markets, new product launches and confirmation from industry analysts 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 leading mobile operators and OEMs are choosing to partner with us and to leverage our AirVantage's cloud services to help them drive M2M market growth.

Additionally, our leading edge 4G development efforts have resulted in important new products, launch commitments with strategic mobile network operators, channel share gains, 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. Looking forward, we have confidence in our strategic position and believe that our expected second half growth drivers are intact. Our new 4G LTE AirCards are ready for launch this summer. We expect to double our product footprint in key operator accounts and we're making steady gains with our PC OEM customers and we expect continued solid growth in our core M2M business. And with that, Alicia we can open the line up now for questions.

Absolutely.

(Operator Instructions)

Our first question comes from the line of Mike Walkley with Canaccord. Your line is open.

Great. Thank you. Jason, I was wondering if you could just provide a little color on the LTE delays. One just kind of the magnitude of the shift you're seeing in terms of your business opportunities. And then two, given the delays of this give your competitors a chance to get into some of your leading customers and there for hurt your longer term opportunity with those customers? Thank you.

Yes, thanks. So to size it is difficult, Mike but clearly, we had early on, we had expected that we would have more LTE contribution in the second quarter than we did. It was quite modest in the second quarter and we experienced no major launches in the second quarter. So our significant LTE shipments will really commence during the third quarter and not at the start of the third quarter. So we are running out of runway to maximize LTE AirCard revenue as an example in the third quarter. Now having said that we're ready.

We do have three different LTE products that are certified on three different LTE networks in North America and our launch cadence is really aligned with our big customers. So we're staying close with them as they prepare for service launch and expect to be their lead device partners when they do launch service so with respect to how that's impacted our going forward share position with key operator customers, our view is that it hasn't. If anything, we believe once we're in the market with our 4G LTE AirCard products with our operator partners that will actually represent share expansion as opposed to a threat of share contraction.

Okay, thanks, and just to build on that, Jason, based on your order patterns and visibility today, would we expect then the mobile computing business to continue to ramp sequentially into the fourth quarter given LTE launching it sounds like some time mid-Q3 or later in Q3. And then Dave just a clarification on the guidance, with M2M down year-over-year obviously with Barnes and Noble is out, would that business grow sequentially off of the Q2 levels just trying to get a pace of the mix between the two businesses for next quarter.

So Mike, with respect to Q4, we're going to be careful not to get ahead of ourselves. I think we probably made that mistake a couple times, so but clearly, we think that we believe the growth drivers are sustainable. I'll put it that way. We are certainly managing the business that in such a way that we don't believe that new 4G launches in a single quarter is the whole story. We're doing it for a sustainable position in those key channels and if those key channels are successful, which we expect them to be, then certainly we expect to grow with those channels. So with respect to, I'm sorry, what was your second question?

With respect to M2M sequential growth in Q3.

Right.

Mike sometimes certainly in M2M there's a bit of seasonality in Q3 so I would say kind of we continue to expect solid year-over-year growth and Q3 stable a little bit sequentially.

Clearly, the growth that we're guiding for in Q3 is heavily weighted to 4G AirCards.

Okay, great. Thank you very much. I'll pass it on.

Okay.

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

Yes, thanks very much. There's some echo on the line guys so I'm not sure what that is but I'm not sure if it's on your end.

Sounds a bit better, Mike. Are you still here?

Yes, thank you. Just trying to understand what's going on with regard to your outlook and maybe starting with the context of your prior outlook where you did call for a significant year-over-year revenue and EPS growth in the back half. And given how your guidance for no growth. What is happening with regard to the delays that would have changed your view, what are you getting surprised by, what is the risk now to your current comments around forward outlook.

Are they higher? Is AT&T or other carriers perhaps taking more than just a delay? Is there perhaps more of a stretch out and less product visibility for you? Are you concerned? Could you just give us a little bit of insight as to why are you now calling for a different view and what's going on?

Well it's mainly around delays, Mike. And delays primarily around PC OEM launches and 4G LTE AirCard launches. So the way we're thinking about it is everything moved a bit to the right. Now with respect to how that changes our view of the growth opportunity beyond the launch quarter, I don't think it does.

We still expect that to have a strong position in those channels and we expect those channels. AT&T as an example to put some significant promotional wood behind the LTE launch where we are as far as I know the only announced launch partner. And we would expect them to promote our class of devices, PC connectivity devices pretty aggressively. And to promote the launch of their LTE Markets quite aggressively. So to the extent they are successful in doing that I think that we certainly stand to be a direct beneficiary of that.

And in addition, we've doubled our -- we will have doubled our product footprint in that channel going from one product to two products. And we've got a similar dynamic happening with Telstra, so those hopefully are good indicators of forward indicators of growth. Of course our partners have to be successful with their sell-through.

And then with respect to PC OEM, the other source of delay, I'll call it, I would characterize that delay as primarily a supply chain delay or a component delay and that has pushed new platform launches a bit to the right. However, based on the design wins we have, our expectation is that we're on a path now where we continue to launch new platforms, more new platforms, more OEMs. And again we think those are good growth factors and at the end of the day those customers have to be successful in their sell-through but our view is as you look out in the future. We're clearly going to have devices in more platforms and with more OEMs and that should bode well for growth in that category.

I guess it's just a question around visibility, Jason, because I know you were excited about the two module wins, the 4G wins --the 4G announcements, excuse me, and you have been excited about that even very recently. And so the question is, but at the same time this is sort of a second time that things are getting pushed out in recent memory for you. So what is the confidence level that you have in visibility to further push out? Is it, are there different dynamics now than when you originally thought you were going to have significant back half growth on in terms of potential risk of further push out?

Well, yes. I mean we're certainly closer, right? We're closer to launch. We've got proof points now and I think we've mentioned on the call we've got three different LTE products certified on three different networks. And it took longer than we expected but that's behind us. And we are preparing for launch with AT&T and we'll be aligned with them when they launch their LTE markets, so could that move to the right? It could, but I think we're much closer now and everybody is focused on a summer launch and I have high confidence that's going to happen.

What about Sprint? Are you seeing any decline in that business? Is there any cannibalization from smart phones?

Sprint has been very solid. We made some commentary on that. Q2, we had some competition enter the channel and we continue to do very well with Sprint. Sell-through continued to be very solid.

Overdrive Pro in particular has very good momentum, and I think that's an overall positive for us and we're favorably positioned in the Sprint channel, from a pricing standpoint. So that all feels pretty good. And as you saw they were a 15% customer. So our expectations are that's going to continue to be steady business.

We of course worry about the disruptive threat that you alluded to about around smart phones used as hotspots. We saw a couple of favorable pricing developments I would say during the quarter around phone as a hotspot and some of the what I would call favorable service pricing around using your phone as a hotspot went away. And hotspot service through your phone is priced much more like a dedicated mobile hotspot devices.

And I think that's a positive development for us but it's kind of hard to tell right now whether or not that's going to be a source of cannibalization of our product category or one of those things where it raises awareness for all of us and grows the market.

Okay, and then finally, on the cost side, you talked about your proactive efforts there. Are you going to, is the $150 million revenue sort of run rate what you're thinking of in terms of where you think your cost structure needs to be. And if that's the case, do you need to trim the $40 million OpEx? Or maybe the flip side of that question is what do you have to do to lower OpEx to achieve 10% margins on that kind of a run rate?

Well we don't expect to stay at that run rate. I think that's we're not, we haven't sized our cost base to $150 million run rate. As you saw in our guidance that doesn't deliver very acceptable earnings, so we're not sized that way.

We're sized for a significantly higher top line. And it's taking longer for us to get there than we had hoped, but again, we're confident we're embarked on the right strategy to get us where we need to be. And now if it plays out over time, Mike that top line is going to prove, if it proves ill loose ever then we'll certainly have to do something further with the cost structure to expand earnings.

But in the meantime, Mike, we're making some pretty good incremental performance on managing our costs.

Okay, thank you, Dave and thanks, Jason.

Our next question comes from the line of Tavis McCourt with Morgan Keegan. Your line is open.

Thanks for taking my questions. Jason, I may have missed it in the beginning of the call, but you talked a lot about AT&T and Rogers. And wondered if you could give an update on Telstra in terms of that timing of LTE launch and device certification.

Sure, so with respect to Telstra, we very recently launched a dual carrier HSPA-plus mobile hotspot. So that's really just getting into the channel and we're seeing some pretty good early returns on sell-through.

And of course we're on as we announced at Mobile World Congress, we're on a rapid pace to LTE program with Telstra as well, specifically LTE at 1800 megahertz. So that program is progressing well, as is typical with Telstra, we're breaking new ground and moving fast. And we are on track to launch our first LTE product with Telstra certainly by the end of the year.

Great and then, although I'm sure this differs carrier by carrier, where is the channel inventory levels on the AirCard products today versus kind of historical norms?

I'd say pretty normal to down actually as some operators are preparing to transition--

Patterns leading up to the launches.

In terms of AT&T's LTE launch specifically it's going to be a limited number of cities initially. Are they going to be running, or for how long will they be running multiple cards with multiple technologies. In other words keep on shipping the 3G cards into that channel for some time, or will they ship the LTE enabled cards only.

Well I can tell you from our perspective it's tough to speak for other players who are currently in the channel, but with respect to what we are thinking or what we have visibility on in terms of shipments to AT&T, it's going to ship to LTE quite quickly. So our expectation is that HSPA plus devices will trail-off quickly, specifically our Shockwave device will trail-off quickly and will make not quite a hard cut over but a pretty fast cut over to the two new LTE products and I would. So if I were to speculate what were to happen in general, I would say that AT&T is probably going to be pretty motivated to encourage users to buy LTE devices even in markets where there is no LTE service simply to future proof those customers, right?

And is there a significant revenue or gross profit dollar difference in those SKUs when they're LTE versus HSPA-plus or is it relatively similar dollar amount for you guys?

I would say it's relatively similar gross margin percentage although our blended ASP is going up a bit. Because right now, we are shipping only a USB device and we'll be shipping a USB device and a mobile hotspot and mobile hotspots tend to have a higher ASP. So that blends the ASP up for us and gross margin is hanging in there in the AirCard family in the mid 20s.

Got you and final question for you, Dave. The capital spending was a little higher than normal -- a lot higher than normal this quarter. Was there a specific project that was on?

A couple things drove that, Tavis. CapEx was $7.8 million in the quarter. A chunk of that was we configured a new office in our Paris office so we downsized the office and moved so that costs a little bit of money in leaseholds. But the biggest chunk of that is really development parts and test equipment for the new 4G LTE products. So ahead of these big launches, we're buying a lot of test equipment fixtures, and development parts and that's what really drove the step up.

And what are the intangible asset purchases on your cash flow statement?

Most of those would be things like development licenses for instance.

Okay. Great. Thanks a lot.

You bet.

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

Hi. Just on the OpEx, the quarter-over-quarter decline in OpEx, how much was attributed to the cost reductions you were mentioning versus a lower product development and launch cost?

I would say the biggest component of that was the lower product development cost and launch costs followed by -- close second would be the activity we're doing in just grinding down costs.

Okay, so Q3 you expect operating expenses to move up because of the launch costs and what not?

Yes, a little bit. So kind of low 40s, Sera, but again very focused on managing those costs.

Okay, great and earlier in the prepared remarks you mentioned ABI Research naming CRS, market leader for embedded modules. What's the industry growth rate for the segment and how do you think Sierra will grow to the overall industry growth rate for the next couple years? Just trying to get a sense of like I understand you guys are going through a period where you are trying to offset growth from the Barnes and Noble stuff, just trying to get a sense of what your expectations are in terms of core overall growth going forward. Not necessarily this year, but--

The way we're thinking about our machine to machine business is that it's a steady 15%-ish year-over-year growth business. And notwithstanding what you may see from industry analysts we think that compares well to the industry growth rate so I think we're pretty good proxy. I think we would be growing at least in line with the industry if not a bit ahead. Our belief is that we're actually gaining share as opposed to giving share up and that's yielding roughly 15% year-over-year growth. So I think that's a pretty good planning metric for us.

Okay, and just last question. I know that you guys had won a number of M2M design wins before and I know that some of them will take a number of years to ramp up. Are there any that's kind of in that ramp up phase that could be the type of volumes to get you to the 10% of revenues in the next year or two or more broad based lower volume type stuff?

Well, I think we've got a couple of pretty large automotive customers now online so we're actively shipping to them. We're actively shipping to more but we've got two I would say of pretty considerable scale and they still fall below the 10% of revenue mark, 10% of M2M revenue even. So I think it's going to take a lot for any one customer to get to the 10% threshold in M2M.

Now having said that, we do expect based on the design wins we have particularly in automotive, I think in automotive that's a space where you have probably the most opportunity to get ongoing M2M design wins of considerable size. And we've been able to secure somewhat I think will be pretty high volume deals that will rollout over the coming years with a number of new automotive OEMs, new customers in Europe, in North America and in Asia.

Thank you. Thanks for the color.

Sure.

(Operator Instructions)

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

Thanks, good afternoon guys.

Hi, Kevin.

Jason, can you just, I know Mike asked about Sprint. You offered pretty good detail. I know that at the current time, your device is priced at a lower price than your closest competitor. And I'm wondering if you could shed a little bit of light on why you think that is, and how long you think that disparity in price might last.

Well it's a great question and unfortunately we don't drive that decision. But we certainly hope it lasts for a considerable amount of time but you know that can flip around and that's really a Sprint decision. I will, so why is that?

I think candidly, we're in the channel now with our second generation Overdrive product and I think that we probably get some points for having invested early in Sprint's dual mode requirements, some significant heavy lifting. And a significant investment and somewhat of a leap of faith and I think that's paid off for us and I believe Sprint believes it paid off for them too. And I believe we've been rewarded for that.

Furthermore, we're continuing to invest in Sprint as a strategic customer, as they contemplate their next generation rollouts as well. So I think that's probably why at this point in time, we're favorably positioned in the channel and why we're a preferred partner, and by the way, we've been getting great reviews on the product, so--

Fair enough, Jason. Do you think that the Clearwire retail presence scale back had a positive impact on your sales there?

Well, we haven't seen it, Kevin. We haven't seen it. Certainly, we were hoping we would see some shift there, but we have not seen it. I would characterize our sales with Sprint as very strong but stable. It did take a step up when Clearwire took a half a step backward on retail.

Right, okay. Thanks. On the PC OEM delays and the LTE delays can you talk a little bit about how they're correlated with the network rollouts?

Do you think, and I guess maybe even touch on the enterprise market, do you think that the PCM vendors are -- I'm sorry, the OEM PC vendors, do you think they are just holding back because they don't see the potential for enterprise spending because I guess the overall view of network development isn't in place yet. Is that what you'd attribute it to? I guess, I'm trying to get to, is why you think the delays seem to be so broad based.

Actually, I'd disconnect the drivers in my mind, so -- and of course there's always myriad factors. But if you focus on the real drivers in our delays with PC OEMs meaning delays in launches of platforms with our modules inside, was really driven mainly by what I would call component delays. So new devices with new brand new protocol stacks and brand new silicon platforms, and took a while for us and our partners to get that stuff right. So that caused our PC OEM launches to move a bit later than we originally had expected. And by the way I'll also point out a lot of our new PC OEM design wins, while some of them are with LTE, quite a few are with Gobi modules so it's not all about LTE with our PC OEM launches so that stuff, the PC OEM launch is moving, right? I would characterize as more of a platform or component delays as opposed to anything going on with operator network launches.

Our delays on the AirCard launch side is really -- we're really trying to stay close with our operator partners' launch schedule and of course their network requirements. And by the way, there's lots of new stuff happening. These are brand new networks, brand new for the infrastructure guys, brand new for the operators, brand new for us, brand new for the chipset guys. So this stuff doesn't happen quickly and it is taking a little longer than as expected but as I stated earlier, I think we're close now. But we've got three different LTE devices now certified on three different LTE networks. So I think most of the pain is behind us and we are much more in a launch preparation mode than a let's get everything done mode.

With respect to the Verizon cloud provisioning service that you offer -- I mean I know its been available for a while. I was just wondering if you might be able to talk to how Verizon's M2M customers view that? What sort of acceptance you're seeing? How it's differentiated you versus the other provisioning services at Verizon? And what you see the potential for that specific type of service to be going forward perhaps with other operators as they push to expand their marketing effort of their own machine to machine platforms?

So good question. So, we have an agreement with Verizon. We are not yet fully integrated with the end phase provisioning system. That is currently underway and we expect to launch that by the end of the year.

So what's different? Well, the way to think about it, Kevin, is we are not a provisioning platform at Verizon. We are not the provisioning platform at AT&T, either. That's a Jasper provisioning platform.

So picture our AirVantage platform as connecting to those provisioning platforms and providing OEM customers with a common user interface, so that they can easily see into those platforms to manage their subscriptions, activate, deactivate those kinds of things. But also through that same common user interface do device management, which the provisioning platforms don't do and applications enablement which the provisioning platforms don't do. So think about AirVantage as more of an application enablement tool, application enablement platform and device Management platform riding on top of these provisioning engines.

Okay, that's fair enough. Can you talk a little bit to the business model there?

Yes, the business model is really in those kinds of implementations, the business model is really all about working with OEMs, and getting OEMs to market. So in that scenario, it's Verizon and Sierra working together to go in OEM business, attract OEM customers to the network. And to the extent we're successful in doing that, we sell our platform as a service on a monthly basis to the OEM.

Okay. Last question for me. Dave, I missed the commentary regarding your gross margin expectations. Could you just highlight your thinking there again and I apologize for the redundancy.

No problem. So for Q3, we expect it to be modestly down from Q2, and that's -- what's going on there is we expect to see a mix shift to mobile computing. So that will blend gross margins down a little bit. But then somewhat offsetting that or partially offsetting that is continued realization on product cost reductions.

Great. Thanks very much gentlemen and congrats on a nice job.

Thanks, Kevin.

Thank you.

We have no further questions at this time. I'd turn the call back over to the presenters.

Thanks, Alicia. Okay, so that ramped up the call for today. Thank you everybody for who participated in the call and for your questions. And as usual, Management will be available here in our Richmond, BC headquarters to field any follow-up questions that you may have.

Thank you, Alicia. We can end the call now.

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