司亞樂 (SWIR) 2011 Q3 法說會逐字稿

Thank you for participating in the Sierra Wireless third quarter results conference call and webcast. Currently, all participants are in a listen-only mode. Following the presentation we will open the floor for questions and instructions will be provided at that time. I would like to remind everyone that this call is being recorded today Wednesday, November 2, 2011, at 2.30 PM Pacific time. I would now like to turn the meeting over to your host, Mr. Jason Cohenour, President and Chief Executive Officer of Sierra Wireless, and Mr. David McLennan, Chief Financial Officer of Sierra Wireless. Please go ahead, gentlemen.

Thank you, Stephanie. 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 and strategy overview and then turn the call over to Dave who will cover third quarter 2011 financial performance in detail as well as guidance for the fourth 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. A summary of our Safe Harbor statement can be found on page 2 of the webcast and is now being displayed. Certain statements and information in this presentation are not based on historical facts and constitute forward-looking statements within the meaning of the applicable securities laws. These statements include our financial guidance summary for Q4 2011 and commentary on our outlook and business drivers. Forward-looking statements are provided to help you understand our views of our short and long-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 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 in management's discussion and analysis which may be found on SEDAR and EDGAR as well as in our 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 at sierrawireless.com which provides a complete reconciliation of our GAAP and non-GAAP results. Back to you, Jason.

Thank you, Dave. I'll start with a high level summary of our third quarter 2011 business highlights. Profitability in Q3 improved significantly compared to the first 2 quarters of the year, and was stronger than expected, driven by higher gross margin and lower operating expenses. Non-GAAP gross margin improved significantly on a sequential basis to 29.6%, driven by solid ASPs and strong progress on product cost reductions. Non-GAAP operating expenses of $39.4 million were also better than expected, driven by favorable foreign exchange rates in the quarter, a higher impact from seasonality, and continued focus on cost management. Combined, these led to non-GAAP net earnings of $0.15 a share, well above our guidance range of $0.03 to $0.05 a share.

While revenue was up 5% sequentially in the quarter, to $146.8 million, this result was below our expectations, as sales of our new 4G LTE AirCard products ramped more slowly than expected and some operator customers significantly tightened inventory levels. Notwithstanding our mixed operational results in the quarter, I believe the Company continued to execute well on our strategy in Machine-to-Machine and Mobile Computing. I also believe that our strategy has us on a track to deliver long term sustainable growth and shareholder value. In Machine-to-Machine our core business continues to grow significantly year-over-year. Our market leadership position is stronger than ever. And our investments in capturing more value from M2M connected devices are gaining commercial traction.

In Mobile Computing, our 4G market position is strengthening. We launched a series of 4G LTE AirCard products with key operator partners during the quarter and we continue to make solid gains with PCOEM customers as well. While our 4G revenue is ramping more slowly than anticipated, we believe that we're well positioned to benefit from the 4G LTE growth cycle with leading edge products, strong channel positions, with key operators who are also rolling out new LTE markets.

Taking a closer look at Machine-to-Machine, Q3 was another quarter of steady growth in our core M2M business. Revenue grew to $75.3 million, up 15% from $65.7 million in the third quarter of 2010. This excludes the impact of Barnes and Noble. Comparing to revenue of $53.6 million in the third quarter of 2009, our core M2M business has experienced a compound annual growth rate of 18% over the past two years. Our Machine-to-Machine business drove 51% of consolidated revenue, and no single customer represented over 10% of M2M sales demonstrating continued progress in diversification. Looking forward, we believe that the M2M markets represents an attractive, long-term, profitable growth opportunity.

We believe in the vision of a connected world, a world where your car, your electricity meter, your home alarm, your appliances are all connected, and many of these over wireless networks. Industry analysts and ecosystem participants agree. In fact, a recent report from Machina Research predicts that more 2 billion M2M devices will be connected over cellular networks by the end of 2020. The drivers of this expected growth are many. Including a wide range of new innovative applications, services, and business models, lower product, development and operating costs, simplified tools and technology, and growing focus and investment from network operators.

In addition to believing in the opportunity, we believe that Sierra Wireless is exceptionally well positioned to capture a leading share of the market growth. We believe the strength of our M2M market position is reflected in the market share results as reported by ABI Research and other market analysts. Our organic and inorganic investments and strong execution have enabled Sierra Wireless to capture the position of global market share leader and we believe that we're continuing to expand our share position.

While our M2M success is broad-based, our focus and momentum in three key segments, Automotive, Energy and Networking has been most remarkable. In these segments, and others, our pipeline of design wins is robust. And our 2G, 3G and 4G product positioning is strong. In Automotive, the connected car is here. Demand is growing. And we're the market leader.

We have many engagements under way with car makers and Tier 1 suppliers, providing devices, expertise, and hosted services and support of applications that span safety and emergency response, connected navigation, telematics, and even streaming media. In 2011 our revenue from the Automotive segment is on track to grow approximately 50%. And based on design wins already secured, we expect Automotive to continue to experience strong long-term growth.

In Energy, smart metering and smart grid rollouts continue to accelerate around the world. And we're seeing more adoption of cellular technologies to capture real-time data on electricity consumption and to enable demand response as well as other services. We're experiencing strong momentum in the Energy segment with integrator and metering partners such as Ambient, SmartSync, Itron, Elster, and EDMI.

In Networking, the strength of our 4G LTE experience and product line, combined with a strong roster of customers, has us particularly well positioned to capture a great growth opportunity. Customers such as Cisco and NETGEAR, network operators and we, all agree, that 4G LTE is an important growth enabler in the Networking segment. While convergence of the wired and wireless worlds is not a new theme, the speed and efficiency that LTE offers, for the first time ever, a powerful wireless backup capability for enterprises and a truly viable wire line replacement solution for homes and small businesses.

Our leadership position at M2M devices also puts us in a great position to capture more value from every connected device. Our M2M vision is to become the M2M platform of choice for OEMs, integrators and operators around the world, making it easier, faster and less costly to build, deploy and manage M2M applications. Our vision of an M2M platform is comprehensive. It encompasses crucial value chain elements such as the world's broadest product range of intelligent, embedded module and gateway devices with onboard application processing capability and a powerful embedded application framework. It also includes a carrier grade cloud perform, tightly integrated with these devices providing seamless connections to global operators and essential features such as device, asset and subscription management, as well as a powerful tool set to rapidly create and deploy compelling applications. We believe that this M2M platform provides the elements required to drive significant long-term value creation. Furthermore, this platform is real and in commercial operation today.

While we're early in the value creation curve, we're making great progress. Our AirVantage cloud perform is already integrated with many of our AirPrime embedded modules and AirLink gateways and routers. AirVantage is already connected to leading wireless operators such as AT&T, KPN, L'Orange, Telenor, Telstra, Verizon and Vodafone. By the end of Q1 2012 we expect AirVantage to be integrated with at least 10 operators around the world. Providing OEMs and developers with a rapid on-ramp to the platform and global wireless networks.

AirVantage customers use our platform every day to maintain and manage their field assets. These include recognized global companies, such as Peugeot, Clear Wire, [Pardon] Clear Channel, CBS Outdoor and Schneider Electric and we continue to secure new customers each quarter. We believe that our continued investment in and success with our M2M platform will deliver compelling benefits to our business and expanding value creation for our stakeholders. And believe that the platform makes us more appealing to OEMs which enables us to capture share. We believe the platform makes our solutions more valuable which enables us to protect margin, and we believe the platform puts us in a position to capture more of the M2M value chain which enables us to secure more gross margin and recurring software services revenue over time.

Turning to Mobile Computing in Q3, despite revenue being slightly weaker than expected, we delivered strong execution on new 4G product development and launch activities. Several of our new 4G LTE products are now launched and established with a number of operator customers and are receiving excellent reviews. As a result of our new product launches, we believe that we have strengthened our channel share at key operators and on a good position to drive growth as our operator customers expand their 4G service to more markets and continue to enhance their competitive position. At AT&T we're the chosen launch partner for their new LTE service, which was officially launched in September and has now rolled out in nine markets with plans to add six more covering 70 million pops by year end. AT&T is now selling our LTE mobile hot spot, which they call the Elevate 4G and our LTE USB modem nationwide.

Reported user experience has been exceptional for the products and both have received excellent reviews in the press as well. We continue to be the only LTE mobile broadband device supplier in the AT&T channel. Telstra continued to deliver strong results in Q3 driven by strong sales of our dual carrier HSPA Plus AirCard mobile hot spot and USB products. Late in the quarter we also launched our first LTE product with Telstra, the AirCard 320U. And we're experiencing a solid sales ramp. We also expect to launch an LTE mobile hot spot with Telstra in the near future.

Also during the quarter we were able to leverage our 4G LTE AirCard product development activity to secure new channel positions with both Rogers and Bell, becoming the first LTE device supplier to the Canadian market. At Sprint we continue to drive leading channel share during the quarter and experienced solid sales of our 3G-4G Overdrive Pro mobile hot spot and AirCard 250U products. Looking forward, we are fully engaged in new product development with Sprint and expect to be an important partner as they embark on their transition to LTE. We continue to view embedded modules for the PCOEM segment as a growth opportunity. While somewhat flat sequentially, Q3 revenue from this customer segment was up 61% on a year-over-year basis. We now have design wins with several market leaders, such as Lenovo, HP, Fujitsu, Panasonic, Sony, and others.

During Q3 we launched our first LTE enabled notebook platform with Sony on the DOCOMO network in Japan. Our expectation is that our customer base will continue to launch more platforms with our embedded modules well into 2012 providing significant opportunity to grow revenue contribution. I'll now turn the presentation over to Dave who will take us through a more detailed look at the third quarter results and guidance for the fourth quarter.

Thank you, Jason, and good afternoon, everyone. We report our financial reports on a GAAP basis however we also report non-GAAP results in order to provide a better understanding of our operating performance. Looking at the specifics of our third quarter 2011 results, revenue was $146.8 million, slightly below the low end of our range of guidance of $150 million to $155 million. Sequential revenue was up 5% compared to the second quarter of 2011, however, on a year-over-year basis, revenue was down 15% from $172.7 million in the third quarter of 2010. This year-over-year decline was principally driven by the loss of revenue from Barnes and Noble and Clearwire, who together, accounted for nearly $330.2 million of revenue in the third quarter of 2010 compared to zero in the third quarter of 2011. Excluding sales to Barnes and Noble and Clearwire, sales were up 3% year-over-year.

In Q3 we continued to experience steady year-over-year growth in our core M2M business, which excludes sales to Barnes and Noble. Core M2M was up 15% to $75.3 million in the third quarter. Mobile Computing, excluding sales to Clearwire, declined slightly from $76.8 million in the third quarter of 2010 to $71.5 million in the third quarter of 2011. Driven by tightening inventory levels at some operators partially offset by solid growth at AT&T, Telstra and with PCOEMs. In the third quarter of 2011 our Machine-to-Machine business accounted for 51% of total sales, while our Mobile Computing business accounted for 49% of sales. AT&T, Sprint and Telstra each accounted for more than 10% of our total revenue in the quarter and together represented 39% of total revenue.

Turning to profitability, we had a very solid quarter, generating higher earnings than expected when we set guidance three months ago. Non-GAAP gross margin as a percentage of revenue improved to 29.6% in the third quarter of 2011, compared to 28% in the second quarter of 2011, and 27.4% in the first quarter of '11. This improvement was driven by continued good ASP discipline and much better progress on product cost reductions. On a segmented basis Machine-to-Machine gross margin was 34.1% and Mobile Computing was 24.7%, in the third quarter.

Non-GAAP operating expenses declined to $39.4 million, down from $40 million in the second quarter of 2011 and from $43.2 million in the first quarter of 2011. Our operating expenses in the third quarter were lower than expected as a result of greater than expected seasonal impact, a $400,000 favorable impact from foreign exchange movement and continued focus on cost management. The combination of improved gross margin, lower than expected operating expenses led to higher than expected profitability despite the weaker than expected revenue. Non-GAAP earnings from operations was $4 million, better than our guidance range of $1 million to $2 million and non-GAAP earnings were $0.15 per share, better than our guidance range of $0.03 to $0.05 per share.

Just quickly recapping summary financial metrics on a GAAP basis, revenue was $146.8 million, gross margin was 29.5% of revenue and operating expenses were $45.1 million in the third quarter. Resulting in a loss from operations of $1.8 million and a net loss of $0.03 a share. As a reminder the reconciliation between our GAAP and non-GAAP results is provided in the press release as well as in the Investor Relations section of our website. Non-GAAP results exclude the impact of stock based compensation expense, acquisition amortization, integration costs, restructuring costs, FX gains or losses on translations of balance sheet accounts, and certain tax adjustments.

Moving on to our balance sheet, our financial capacity remains strong. As expected we consumed cash during the third quarter of 2011. During the quarter cash flow used by operations was $10 million, CapEx was $4.6 million, and other items consumed $3.9 million, for a total cash consumption of $18.5 million, leaving us with an ending balance of $100.7 million or $3.22 per diluted share. Focusing on the $10 million use of cash from operations, this includes a large working capital amount of $17 million. This was driven by an increase in accounts receivable of 10.6 as a result of a slight increase in DSOs, combined with stronger sales later in the quarter, which remained in accounts receivable at quarter end. As well as net cash inventory payments of $5.1 million driven by payment during Q3 of inventory which we brought on to the balance sheet late in the second quarter which was partially offset by the sale of some of this inventory during the quarter. And as I mentioned, outside of cash used from operations, CapEx was $4.6 million and other items consumed $3.9 million of cash, this includes the purchase of approximately 330,000 shares, Sierra Wireless shares, by the restricted share unit trust for a total of $2.5 million.

Moving on to guidance, we're providing guidance on a non-GAAP basis, which as previously stated, excludes stock-based compensation expense, acquisition amortization, integration costs, restructuring costs, FX gains or losses on translation of balance sheet accounts, and certain tax adjustments. In the fourth quarter of 2011 we expect revenue to be between $145 million and $150 million, with both Machine-to-Machine and Mobile Computing being roughly flat compared to Q3. This reflects expectations of a slower than expected ramp of LTE AirCard sales. We expect the majority of the gross margin improvement which we achieved in the third quarter to be sustained in the fourth quarter. And we expect operating expenses to be slightly above the seasonally low level we experienced in the third quarter. As a result, we expect non-GAAP earnings from operations to be between $1.5 million and $3 million, with other income -- with other income and taxes expected to be nil, the resulting non-GAAP net earnings would be the same $1.5 million to $3 million or diluted EPS of $0.05 to $0.10 a share. With that I'll hand it back to Jason.

Thanks, Dave. So summarizing our Q3 2011 results and outlook. Strong gross margin and lower OpEx led to improved profitability. We're encouraged by this improvement as we believe that most of the gains experienced in Q3 are sustainable. We believe this strengthens our business model and enhances our ability to drive profitability leverage with top line growth. While second half 2011 revenue has clearly not ramped as quickly as we had expected, we believe that our Company strategy is sound and that our core business drivers remain strong. We're the clear global leader in the Machine-to-Machine, a market that offers tremendous long-term growth opportunities. Driven by well timed investments, a sound strategy and strong execution, we have driven steady share gains and have seen strong revenue growth in our core M2M business of 40% over the past two years.

Our market position and design win pipeline are strong, which bolsters our view of the growth opportunity. We're also making great progress on realizing our vision of becoming the M2M platform of choice for OEMs and operators around the world. We believe that our vision will enable us to capture more value and margin from every connected device, strengthening our ability to drive long-term growth and shareholder value. In Mobile Computing, our 4G LTE product investments resulted in significant new product launches with AT&T, Telstra, Rogers and Bell during the third quarter. And we expect more LTE wins in the future.

We believe that our new 4G LTE product execution has enhanced our channel share and that we're in a good position to drive revenue growth as our operator customers continue to roll out new LTE markets. Our position with PCOEMs has also strengthened considerably in the past year. We now have design wins with leading manufacturers around the world who are actively integrating and launching new platforms with our embedded modules. We believe that more OEMs and more platform launches puts us in a good position to drive continued revenue growth in this segment. Operator with that, this concludes our prepared remarks and you can now open the line for questions.

Certainly.

(Operator Instructions)

Matt Ramsey, Canaccord Genuity. Your line is open.

Good afternoon, thank you for taking my questions. Jason, I just wanted to start and ask a couple of questions about the obvious AT&T, LTE ramp. It's launched in nine markets now and you reiterated AT&T stands at 15 by the end of the year. After the launch, have you gotten any early real read on sell-through. I know that you said the initial reviews from customers and industry analysts was positive for your products, but do you have any early reads on sell-through and how that might project as they roll out markets?

So far, well, first of all the products are launched nationwide, Matt, is one thing to understand and obviously we would expect sales and promotion to be stronger in the markets that have actually launched the LTE service. It's a bit early to see any kind of trend line on sell-through, in those markets. So far the anecdotal feedback has been positive on the user experience and positive on store sales, particularly by the way for the mobile hot spot. But with respect to a sell-through trend line it's a bit early to see one forming at this point in time.

Okay. Fair enough. I'm just taking a look at your guidance, you've guided basically flat in both of your businesses, both in the M2M and Mobile Computing side. So I was going to try to dig in a little bit more and see if you could add a bit of color to the expected split between the AirCard business and the embedded business in Q4, and maybe discuss if you guys expect any impact to your embedded laptop business from some hard drive supply issues that might be hitting the PC market because of the floods in Thailand. So maybe discuss the pluses and minuses to the two parts of your Mobile Computing business from a mixed point of view for Q4.

Sure. So we'll focus on Mobile Computing on that question. So our bias is that certainly over time, and probably we'll see a bit of this in Q4, to see PCOEM drift up a bit. But I think that is going to be the stuff of a more of a longer term view as platforms continue to launch. With respect to the AirCard mix, we continue -- we expect to see that continue to be, I would say, a solid contributor, but certainly we're cautious, and I think that's reflected in the guidance, cautious with respect to an expectation over a very strong short-term ramp. So we're cautious on that. With respect to exposure to the floods in Thailand, we manufacture all of our products in China, so certainly our factory is not exposed. However, we do source some components that are manufactured in Thailand, some of those components are affected by the floods. However, we believe that we've got that situation, the supply chain situation, for those components, under control, and right now we've not factored any revenue impact in Q4 as a result of the floods in Thailand.

Okay. Thank you very much for that additional color, and I guess I have one more question from me and then I'll cede the floor. You guide to essentially flat M2M segment sales in Q4, and at least in our model, we had modeled some upward seasonality in that business and I realize that the seasonality would not be the same as it was last year when you had the Barnes and Noble business which was holiday-centric. But I would have still expected some positive seasonality in Q4. Could you maybe comment more on that as just general macro weakness from a flat quarter over quarter? Or are there some other dynamics going on there and which specific segments of M2M might those dynamics be going on to cause it to be flat?

Yes, sure, that's a fair question. The way we're viewing that in the short-term is, this is kind of the normal ebbs and flows of individual customer situations, I would be careful not to take a single flat quarter as the new normal in Machine-to-Machine. Our view is it's normal ebbs and flows and our long-term outlook is for continued steady growth. Now that long-term outlook, of course, is dependent on a-- I would say a reasonable macroeconomic environment -- I was going to say robust -- but a reasonable macroeconomic environment, that expectation would not account for a large-scale macroeconomic change with respect to overall industry growth. So the way I think about it is, single quarter affected by normal ebbs and flows, and the mid to long-term outlook for steady growth in Machine-to-Machine is unchanged.

Okay. Thank you very much, and best of luck going forward, guys.

Sure. Thanks.

Tavis McCourt, Morgan Keegan. Your line is open.

Thanks for taking my question, and, Jason, I apologize if you addressed this earlier, but what was the actual driver of the gross margin improvement in the quarter?

It was -- the key factor there, Tavis, was product cost reductions, so I think when we put guidance up three months ago, we had some of these product cost reductions in our sights, but we chose to take a conservative view on how much progress we would make, and at the end of the day we made significantly more progress in our product cost reduction initiatives than we had anticipated. So within product cost, fairly broad-based, the bulk of it is in components, as you would expect to have that kind of progress on product cost reductions they're pretty big components, so big percentage of the bump. But we also made progress in the areas of overhead, as well. So I would say it's pretty broad-based on cost of goods. With respect to ASP, we didn't see any giant ASP jumps. We had good ASP, I would say, performance or protection, but no massive ASP jumps. So it was really a cost of goods story.

Got you. And then two follow-ups, first with Windows 8 coming out next year in kind of a new slate of tablets around that, do you expect that to be a module opportunity for you, or do you think that will be more of a solution that will require chip centers?

No, we do view that as an opportunity. That is going to cause us to do some work of course in support of Windows 8. But to the extent that traditional Mobile Computing manufacturers are going to launch tablets with Windows 8, we view that as an opportunity for our modules, probably not a great opportunity for our modules with the more traditional wireless-centric guys.

And then in terms of competition at the two carriers you launched LTE devices at this quarter, what are the competitive dynamics right now on those LTE devices, and what do you expect them to be in six or nine months? How big is your window before any kind of first to market advantage is swallowed up?

It is tough to size the window, right, but at AT&T, we've got the prime position, and as I indicated in the script, we're the only LTE supplier in there right now of our class of devices and we don't expect to have 100% share there forever, right? So when do we expect competition to enter? I would say not for a while. I think we have some green field here, of at least a quarter, two quarters, something like that. With respect to Telstra, probably the same. We've shared the channel at Telstra for quite some time with ZTE, I'm not going to say that's been harmonious, but we each have been able to take our fair share, if you will, of that channel, and my expectation is in both of those channels we'll continue to have a leading position.

All right. Thanks a lot.

Sure.

Mike Abramsky, RBC Capital Markets. Your line is open.

Yes, thanks very much. The Mobile Computing business looks like it is going to decline more than 10% this year, and I an just wondering how do we think about the Computing business longer term? What are some of the both headwinds and tailwinds since 4G LTE seems to be ramping more slowly than you expected? Is this a declining business, in other words, a niche business, or a growing business?

That is a very fair question, Mike. So year over year one big change to point out is a single customer change, with Clearwire. And so that, if memory serves me was $30 million, $35 million contributor in 2010, and near nothing in 2011. So that's been a call that a single customer headwind.

Looking forward on our opportunity in 4G LTE, I think we're inclined to believe that it is a growth opportunity from where we are today, as more LTE markets roll out. However, our perspective is also cautious. Right? Because we certainly expected to see the impact of the 4G LTE growth cycle, by now. And we haven't seen it -- we haven't seen it affect that part of the business in any -- in a meaningful way. So I think we're cautious. On the good side we've got great products, great channel position, and LTE rolling out and we do think LTE enables some new and different applications. But on the other hand we're cautious given what's happened here in the second half of 2011.

And just could you just reiterate for the laymen, what is going on with regard to the slower 4G LTE growth cycle versus your prior expectations? Is this a supply -- is this a demand issue from the customer end, or is this a carrier rollout issue? Is this interim or perhaps a more muted structural ramp going on in the industry? Could you give us a little perspective on that?

Again, very fair question and as I intimated in my previous answer, we're cautious, because we don't have perfect visibility of what the growth rate is going to be. So a couple of things. So what's happened, why haven't we seen the ramp in a significant way yet? Part of that is timing, so LTE markets ended up lighting up later than we anticipated. So our products got into the market later than anticipated. So part of it is timing.

But also part of it is pace of LTE market rollout, and I think we have a certainly a more favorable bias to the opportunity in AirCards, should the pace of LTE market rollout quicken, however if the pace of LTE market rollout goes slowly, then that will certainly color our bias on the growth opportunity. So, my gut feel right now is, as more markets rollout, more LTE markets rollout, that, that should be a cycle growth opportunity, a new technology cycle growth opportunity. But, again, we're cautious and I think it is safe to say, Mike, that certainly our expectations at the start of the year were considerably higher than they are right now with respect to the speed and magnitude of that growth ramp.

Jason, perhaps -- could you just help -- the original thesis that you had sort of thought would rollout was that these networks would initially be card and module-oriented networks, that that would be kind of the original demand would be -- you would benefit from, and yet it seems like the focus is on SmartPhones for LTE, as being what the carriers are promoting. And does that have anything, maybe, to do with this?

Well, I don't know if that -- I don't know if the mix thing has much to do with it, although the promotion thing certainly does, Mike. I think this is probably in part related to the pace of LTE market rollout. The more markets LTE is in, the more -- the better use of large-scale promotional dollars, there exists a better environment to spend those promotional dollars around this class of products. I do think the promotional aspect is related, and, again, my belief is that as there is more -- as more coverage gets deployed that should gear up more promotional activity. But again, we're taking a cautious view of that now, and as I said earlier in the year, I think the view was much more aggressive.

Okay. And then very briefly and lastly, and thank you, the outlook that you provided it seems more challenging now on the visibility front in terms of trying to be as accurate on guidance as I recall you have been in past years. And I'm just wondering what is going on there?

Yes, a bit of irony there, too, since 50% of our business now is Machine-to-Machine, and it has been more predictable, and we expect it to be more predictable. So the unpredictability is half our business now and not all of our business. And yes Mike, I think it is safe to say we didn't call everything correctly there. So, I'm going to sound repetitive here, but again, the timing on LTE rollouts happened later than we expected, so that certainly affected it. And now I think we're more reliant on the pace of new LTE market rollout, and related promotional activities.

Okay. Thank you very much for your answering all of my questions. I appreciate it.

Sure, thanks Mike.

Peter Misek, Jefferies. Your line is open.

Thank you. I guess following up on these growth questions and dynamic questions, is there anything you can do, that you feel like you can do or should have done to boost growth here. Is there an acquisition, is there market share? If we look at some of your competitors like Telit, for example, they seem to have gross margins that are very high and the seem to have been taking share in some markets. Can you walk us through any strategy you may have to boost growth here, and I guess part of the commentary really comes around the variability that is being evidenced in the market that I guess no one really understood or appreciated.

Yes, well again I think the variability piece is really contained in our Mobile Computing business, right? Is the way I would characterize it. Our core Machine-to-Machine business, aside from Barnes and Noble, which I know created volatility, but the core Machine-to-Machine business, that's put up a compound annual growth rate of 18% over the past three years. So I think that's been quite consistent. Now, of course, a big part of that success was driven by a major transformational acquisition in 2009. So we certainly have been active on the M&A front.

So looking forward is there -- and maybe just speaking about Machine-to-Machine is there a way to goose growth through consolidation or acquisitions that strengthen other areas of our Machine-to-Machine business? Absolutely. And we're open for business there. We, so far we haven't found the right targets that fit our model, and are priced right. Of course, we looked at the Motorola asset and deemed it not a good fit and probably not a strong value driver, and maybe you'll see that over time. But, I'll also point out that we've got strong competitors like Telit but I think they just put up a warning and our view is that the limited platform that Motorola had in the Machine-to-Machine business was comprised of a few customers, and our view was maybe it is better for us to just go try to take share with those customers, as opposed to buying that asset. And I'm pretty confident that is probably going to work out to have been a good decision.

So what else can we do to goose growth? Well, I think we are doing everything we should be doing. Again, Machine-to-Machine, it's growing at the pace we thought it would grow, and we're open-minded to acquisitions that will accelerate that growth, and our Mobile Computing, it has really been a focused strategy in getting our 4G products done and in market, and then we're highly reliant of course on our customers to sell those products once they're in market and reliant on rollout of network services and promotional activities and the like. So, I'm not sure there is anything dramatic we could have done differently there. I think we have the right collection of assets, if you will, now deployed in the field, to drive growth. I think our primary growth drivers are still intact, steady M2M growth, good solid exposure to the 4G AirCard growth cycle, and PCOEM ramping. That has been our theme.

Those three platforms are still in place, and I'm optimistic that those three platforms will, in the fullness of time, drive growth. Now, the other thing we're doing, Peter, is we're focussed on business model. I hope it has been noticed that we had a significant improvement in both gross margin and in operating expenses. So, as we step through whatever this ramp-up on the top line is going to be, I think this improved the business model puts us in a much stronger position to deliver growing profitability over time as well.

Peter, it's Dave here. Just one thing to add on the side of potential M&A activity is that since the Wavecom acquisition we've also invested heavily in new product lines and our success in the Automotive vertical is a good example of that. We now have a totally new from the ground up designed automotive special-purpose module, and that's been able to allow us to gain new design wins and really grow in that part of the business. So that's an example of organic investment that's designed to drive growth.

Thanks. Just one last quick question on the Automotive market. Can you help frame that market for us, how big it is unit wise, revenue opportunity, any kind of metrics you can give us there? When could we expect this market to really contribute? Thank you very much.

Sure. Well, so at a high level the market is already contributing in a meaningful way. As I indicated last year, last year Automotive was a key contributor. This year we expect to experience 50% year over year growth in that segment alone, and we've got what I would characterize as a tremendous pipeline of design wins for our new automotive grade products which get launched in the coming years. So our expectation, without putting a very specific number on the growth opportunity in Automotive, we think it's big. We think the connected car is real. There's governmental, a regulatory drivers such as eCall in Europe. And I think that there is -- there is great end user demand around things like OnStar kinds of services, and in the future streaming media directly to the vehicle, and we're involved today in design wins that are intended to drive just those kinds of services. So we are very bullish in automotive in the long-term.

Thanks, guys.

Sera Kim, GMP Securities. Your line open.

Hi, good evening. Earlier you mentioned overall market growth for M2M, I think it was in the mid-teens. I am just wondering, if I look at your Q4 guidance that you mentioned flat M2M, core M2M revenue, so that implies growing about 9% this year. I'm just wondering have you guys seen any changes on the competitive landscape front just given that the growth is lower than what the overall market seems to be or has there been any changes in terms of pricing trends?

Certainly there has been market dynamics. So I will say this, Sera, I think our view on our position in the Machine-to-Machine market is that we're the clear number one player. That wasn't the case at the start of 2010. It is the case now. So certainly, that implies we gained share. So, furthermore, I would be careful not to take any single period, if you will, and say that that's our growth rate and we're growing slower than the market.

In fact my view is we are in share gain mode, and if you broaden the window a little bit to three years, we're putting up a compound annual growth rate of 18%. So, frankly, I'm pretty happy with our Machine-to-Machine position, and I'm pretty happy with our share trajectory. Now, are there competitive dynamics changing in the industry? Of course, everyday, I don't think that we are seeing a new onslaught of new competitors entering the market. It tends to be the normal participants, players like Centurion, Telit and others, and pricing of course is always important. And we need to be price-competitive, but unlike some of the other players we're also very focussed on providing additional value-add. And that's both at a business model level, so we provide modules, but we also provide value added plug and play gateways at 50% plus gross margin.

We also provide platform services at very high gross margin. And even on our embedded module devices we have products that deliver not only your connection to wireless networks but devices that can also provide your application processing function, and for those products, we get a premium. I think with respect to market position and our pace of growth relative to the overall market, very comfortable with that, and I'm comfortable with our share trajectory and I'm also comfortable that we are taking more value out of the value chain than other players.

Is this share trajectory based on the design wins that you have won to date but we haven't seen yet in the revenues, just to be clear?

Well, it is both, Sera, it is both. If you look at the ABI information over the past two years, based on revenue it shows clear share gains based on currently shipping products, and furthermore as we look forward, yes, I think that our design win pipeline also implies share gain.

Are the design wins that you've won so far, are you able to provide what percent will be launched in revenues that will show up in 2012 versus those that are going to be longer term?

Well, no. I think that's extraordinarily hard to do. Automotive, I'll give you some anecdotal commentary around that. Automotive design wins where we have a strong pipeline, those roll out over years, not months, right? So we're seeing some of that in our results today. Next year we'll see more, the year after that we'll see more, and the year after that we'll see even more. So, taking Automotive as an example, I think we're on a trajectory to go from something like $30 million in sales last year to $100 million in sales in three years' time and that is based on our existing pipeline of design wins. Other markets have shorter design-in and launch cycles, and my expectation is you'll see revenue contribution from those design wins in a shorter time horizon.

That is helpful. Thank you. Just on the PCOEM side, in previous conference calls you have mentioned that you had expected a number of launches in the second half. Now just given that PCOEM contribution was flat in the quarter, or a little bit lower in the quarter, did some of this get pushed out to 2012? I am just wondering did you lose any of the design wins due to missed product launch windows, i.e. could it be pushed out to the next product launch windows for later next year? I'm just wondering how that works.

No, I don't think that was a factor. I think certainly the pace of integration and launch is happening a little more slowly than we thought. That is certainly the case. And we are seeing more platform launches, not all of the platforms we want, of course, are in market. They will continue to launch probably throughout 2012. Probably one thing that caught us maybe a little by surprise is that some of the design wins we have with customers, it took them a bit longer to work through some of the inventory that they had of old product that wasn't supplied by us and transition to the new product that we got the design win for. So that transition at a couple of customers took a little bit longer than expected, but overall I'm pretty bullish that we've got a baseline here of now roughly $9 million or $10 million a quarter, probably goes up a little bit in Q4, and I think it continues to go up from there as these new platforms launch.

Okay. And just last question on gross margins. Is this a level that you think can be sustained? And, second question related to gross margins is would you be able to provide the product mix between USBs and hot spots in the quarter?

Yes, so -- Dave.

Hi Sera, this is Dave. Just on gross margin, I think just looking at our Q4 guidance, we make great progress in Q3, and we expect to be able to keep the majority of that increase from -- that we saw from Q3 to Q2 and push that into Q4. So, I think that is sustainable. It will be driven by things like mix of product -- mix between the product segments and then within the product segments themselves, the mix of those products.

Would you be able to provide the mix between USBs and hot spots in Q3 and your expectations in Q4?

I think the mix is likely to -- the mix between USBs and hot spots is favoring USBs -- sorry, favoring the hot spots. So that trend is evolving. We've seen that over the past quarter. But I think the bigger mix issue, or mix between is going to be within the categories themselves, because I think the categories will stay relatively stable in terms of their percentage contribution. And then, longer-term, we've had a 30% target gross margin in our long-term model for quite some time, and I think we've made some good progress this year with improvements in gross margin coming up from the mid-27% area up to 29.6% here in Q3.

Okay. Great, thanks a lot.

Stephanie, are there any questions?

Todd Coupland with CIBC. Your line is open.

Good evening, guys. I was wondering if you could, if you're willing to disclose the splits in AirCard between 3G and 4G in the quarter.

Well, probably we would be willing to if I had the number off the top of my head. But I don't. There's so many generations here, right? So there is--

There is LTE, there is WiMax.

We shipped some PA plus to AT&T early in the quarter.

Or maybe if it is a little bit simpler to think about it, how much LTE did you get in the quarter, and how much did you miss your expectations by? That's ultimately what I'm after.

I see, I see. We're probably not going to give you precision on that, Todd, but I think I will share with you that we had higher expectations, of course, than we actually delivered in Q3 on LTE sales in. I'll give you that much. And I also mentioned in the script, as well, I'll reiterate, that in addition to that, another factor in the area of AirCards was a couple of customers taking a different view on inventory levels, and tightening inventory levels driven by their own business dynamics, they chose to take inventory in the channel down pretty considerably, and that had a negative affect in Q3, as well.

So if you think about, maybe you can answer this question, if you think about sort of bundling inventory and slow ramp of LTE, how much do you think that's shaved off the second half of the year?

Oh, gosh. I tell you what, I'll dodge that question because I don't know the answer, but I will tell you, because our crack financial team just came up with the number, that in Q3, 20% of overall revenue -- is that overall revenue?

That's consolidated.

20% overall revenue, consolidated revenue, was LTE driven.

20% of the $146 million?

Yes, yes, $146.8 million. But that -- but that is a combination of AirCards, predominantly AirCards but also some modules in there, as well.

All right. My second question, if I could, how do you think SmartPhone apps can create a hot spot? What kind of effect do you think that's having on your own hot spot sales?

That's a great question, and clearly that's hanging out there as a both a disruptive threat, and an awareness creator. So we know it's there. Going the other way, there are so many more Wi-fi enabled devices that would seem to be well suited for a dedicated device. From E -book readers to tablets to iPads, et cetera.

And certainly in a multi-user situation a phone as your hot spot is just not practical, right? You need a dedicated pipe, a dedicated power source for that to have any kind of meaningful user experience. So, the anecdotal feedback is, not much of an impact. And this is coming from our operator customers, obviously it is something we need to continue to watch closely but the anecdotal feedback is, not much of an impact.

From their point of view if they can get another data plan out there, they'll do it, so why not? Right?

Exactly. Exactly.

I guess from your point of view I'm told iPhone sort of works pretty good with a few-dollar app versus another X dollar a month plan. So do you think we should be thinking about this in the context of enterprise versus consumer use? Or is that too draconian?

No, I think that is probably too draconian right now, but I do think it is something we all need to monitor and keep an eye on. Now, I will also point out that the operators have made a pretty significant price move -- most of them have made a pretty significant price move on tethering plans. So it is no longer an economic no-brainer to just use your phone as the hot spot because you get a better deal on service. You're going to pay for that, right.

No, that's true. The arbitrage is limited. But I thought ease of use and all that. That said, that's great, thanks a lot, Jason.

Sure. Let me comment on ease of use as you disconnect, ease of use, I would certainly favor a mobile hot spot. Right? You turn it on and it works.

Yes.

So ease of use and power management and overall performance, those are pretty important benefits. Particularly in a multi-user environment. And so and multi-user environments I will argue will often be consumer environments, right?

No, that's true. That is a fair point on the power side for sure. But thanks very much.

You bet. Stephanie. We have reached the time limit for the call and I'm afraid we don't have time for any more questions, but, so you can wrap up the call now and I'll offer for those currently on the line or in the queue, management is standing by and will be happy to talk to you one on one.

This concludes--

So Stephanie, can you wrap up the call?

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