司亞樂 (SWIR) 2011 Q4 法說會逐字稿

Good afternoon, and welcome to the Sierra Wireless fourth-quarter results conference call and webcast. At this time, all lines are in a listen-only mode. After the presentation, we will conduct a question-and-answer session via the audio conference call. Instructions will be provided at that time. I would like to remind everyone that this call is being recorded today, Thursday, February 9, 2012, at 17.30 Eastern Time, 14.30 Pacific Time. I would like to turn the meeting over to Mr. Jason Cohenour, Sierra Wireless Chief Executive Officer. Please go ahead, sir.

Thank you, Martina. 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 fourth-quarter and full-year 2011 financial performance in detail, as well as guidance for the first quarter of 2012. I'll then return for some brief summary comments and Q&A. But first, Dave will read a summary of the Company's Safe Harbor statements.

Thanks, Jason. A summary of our Safe Harbor statement can be found on page 2 of the webcast that 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 the first quarter of 2012, and commentary on our outlook and business drivers. Forward-looking statements are provided to help you understand our views of our short-term and longer-term prospects. We caution you that forward-looking statements may not be appropriate for other purposes. They represent our current views and may change significantly.

Our forward-looking statements are based on a number of material assumptions including those listed on page 2 of the webcast, which could prove to be significantly incorrect, and our forward-looking statements are subject to substantial known and unknown material risks and uncertainties. Some of key material risks and uncertainties are listed on page 2 -- some of our uncertainties are listed on page 2 and I'll draw your attention to a 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 at SierraWireless.com, which provides a complete reconciliation of our GAAP and non-GAAP results. With that, back to you, Jason.

Thank you, Dave. In the fourth quarter of 2011, we continued to experience improved operating performance, compared with the first half of 2011. Q4 revenue of $147.2 million was in line with our expectations, despite a negative impact from supply constraints and weakness in Europe. Gross margin was a solid 28.3%, which includes the negative impact from an unusual inventory write-down, plus unfavorable mix and foreign exchange. We also continued to make good progress on our cost structure, resulting in Q4 non-GAAP operating expenses of $38.3 million.

Solid revenue and lower expenses drove better-than-expected non-GAAP earnings from operations of $3.4 million. Q4 non-GAAP EPS of $0.08 was in line with our expectations. Revenue from our M2M business was a bit softer than expected at $71.3 million, or 48% of consolidated revenue. Relative to our expectations, M2M revenue was negatively impacted by supply constraints as well as generally weaker sales in Europe and a weaker Euro versus the US dollar. Despite these near-term challenges, we continued to invest and innovate in M2M and are very bullish on our future growth prospects.

During the quarter, our design win momentum continue to be strong in key market segments, adding to our solid pipeline of new customer programs, which we expect to launch and ramp over time. I'm also pleased to report that our Mobile Computing business finished 2011 much stronger than it started the year. New LTE product launches, expanding LTE market rollouts, and a growing PC OEM business resulted in Q4 Mobile Computing revenue up $75.9 million, or 52% of consolidated revenue, and that is our best quarter of the year.

Turning to an overview of 2011. In many ways, the year was very challenging, particularly operationally. Strategically, however, we accomplished a great deal, and had the company in a much stronger position heading into 2012. Consolidated revenue for the year was $578.2 million, down $72.1 million or 11% from 2010. The loss of Clearwire and Barnes & Noble, which together had accounted for $96.5 million of revenue in 2010, resulted in a strong headwind that we were unable to fully offset.

Despite these operational challenges, I believe that our Company's strategy is sound, and that our strategic investments in M2M and LTE are starting to pay off. In M2M, we're the market leader, and continue to experience solid year over year growth in our core M2M business, excluding Barnes & Noble. Our core M2M revenue grew 9% in 2011 to $292.5 million. Over the past three years, this business has delivered a compound annual growth rate of 19%. We believe that we're in a great position to continue to grow share in M2M, and believe that the market offers strong long-term growth prospects of the Company.

In our Mobile Computing business, our expected LTE volume ramp happened later and was slower than expected. Notwithstanding this setback our new LTE product execution was strong, and we launched a number of new innovative LTE products with our operator customers, by year-end. We believe this positions us well to capture growth in 2012, as our customers continue to deploy LTE service in new markets. Additionally, we reestablished ourselves as a premier supplier of embedded solutions in the PC OEM market, capturing new design wins, launching new products, and driving revenue growth of 68% over 2010. While driving strong program and strategy execution in our two lines of business, we improved the leverage in our operating model, reducing year over year and run-rate operating expenses considerably, and improving gross margin in the second half of the year.

Taking a closer look at our Machine-to-Machine business, Q4 was a bit soft for the reasons previously stated on the call. However, we view this short-term softness as consistent with the normal ebbs and flows in the business, and our mid-to-long term outlook for steady growth in Machine-to-Machine is unchanged. Our long-term growth thesis is supported by the expansion of our number one market share position and strong design win momentum, which is feeding a growing pipeline of customer programs which will launch over time. In Q4, we continued to secure new design wins in key segments of the market. In Automotive, Axia Group selected our AirPrime embedded wireless modules to provide high-performance connectivity to the car, enabling access and delivery of new services to vehicles. Additionally, both Harman and Audi successfully tested our new AirPrime LTE modules, with in-car connected infotainment systems. Working with leaders such as these, we're hoping to make driving safer and improve vehicle serviceability, while also helping completely transform the in-car experience, which will soon include video-on-demand, internet radio, high band with internet access, and more. We currently have approximately 10 automotive programs in our pipeline that have yet to enter start of production.

In energy, Gorlitz, a leading manufacturer of advanced meter reading and energy information management systems based in Germany, selected our AirPrime embedded wireless modules for their latest smart metering platform. With leaders such as Gorlitz, we're helping to manage energy consumption and to make energy distribution more efficient and sustainable. In addition to these, we had continued design win and program success with OEMs in other key segments, such as networking, payment, field services, industrial monitoring and security.

A key driver of our success in M2M has been our innovation and product line execution. In Q4, we continue to drive M2M market expansion. In November, we introduced the AirPrime WS6318, the world's smallest cellular embedded module. The WS uses highly innovative packaging techniques to achieve a size that is 50% smaller than anything else on the market. It is small enough to literally be wearable, enabling M2M applications that were previously impractical.

We also launched our AirLink GX440, the first LTE industrial gateway certified on the Verizon Wireless network. This device leverages the LINUX and processor platform of the GX400 launched earlier in the year, and adds high-speed 4G LTE connectivity, enabling high bandwidth applications such as high definition video surveillance, network fail over for branch offices and mobile office applications for public safety. We're also continuing to gain traction with our value chain expansion efforts. For example, we've recently captured two new design wins with large global OEMs that include both Sierra Wireless AirLink devices and our AirVantage M2M cloud platform services. These customers will leverage our device and platform solutions to rapidly build, deploy and manage their applications, enabling them to deliver a differentiated level of service, and to capture a competitive advantage.

We also announced a partnership with Sprint to provide AirVantage M2M cloud platform device management, subscription management, and application enablement services to Sprint customers. This collaboration helps Sprint customers, application developers, and OEMs get their solutions up and running on the Sprint network more quickly and cost-effectively. Including Sprint, our AirVantage M2M cloud platform is now connected to eight operators around the world. In M2M, we're committed to playing across the value chain. We believe that this enables us to bring much more value to our customers, strengthen our differentiation, and build a more profitable, more defensible, M2M enterprise over time.

Moving to Mobile Computing, as mentioned earlier, we delivered our best quarter of the year in Q4 following a challenging start. We experienced broad-based strength with our three largest operator customers, AT&T, Sprint and Telstra, which helped to drive AirCard sales up 6% sequentially to $64 million. A seasonal lift, new 4G LTE product launches, and continued 4G LTE market rollouts were drivers of the sequential growth. We also continued to command leading 4G-LTE share in our key channels, and reported sell-through in the quarter was strong. At AT&T, their LTE network rollout continued to gain momentum, and we continued to benefit from providing the only LTE mobile broadband devices in the channel. Sales of both the Elevate Mobile Hotspot and Momentum USB modem are going well, and the products are getting great reviews, including PC Magazine's Editors' Choice awards.

At Sprint, we experienced solid sequential growth with the Overdrive Pro Mobile Hotspot and continued to be their leading mobile broadband device provider. We were also a featured partner in Sprint's LTE announcement at the recent CES conference, where they showcased our unique Tri Network mobile hot spot, which integrates LTE, WiMAX, and EVDO capability in a single package. We believe that we are very well positioned with Sprint, and that we will be a key part of their LTE network rollout plans.

At Telstra, we had another strong quarter and a very successful launch of our new AirCard 320U LTE USB modem in November. We also expect to launch a new LTE mobile hotspot with Telstra in the first half of 2012. While it took longer than expected, we believe that the key enablers for our AirCard business are in place. We have a powerful LTE product line-up, our channel positions are strong, and our customers are continuing to deploy and promote their LTE services. We also continued to experience a resurgence in our PC OEM business, with Q4 revenue up 52%, on a year over year basis. Revenue contribution came from a diverse set of customers including HP, Lenovo, Fujitsu, Panasonic, Sony, NEC, and others.

We're also seeing some very interesting new design-win opportunities emerge for Windows 8 and Ultrabook platforms. With new opportunities like these, a strong set of core customers, new 4G embedded products, and the exit of price leader Ericsson, we believe that the growth opportunities in this area of our business continue to strengthen. With that, I'll now turn the presentation over to Dave, who will take us through a detailed look at fourth-quarter results and guidance for the first quarter.

Thanks, Jason, and good afternoon everyone. Focussing on our non-GAAP fourth-quarter results, we had a solid fourth quarter, and we were pleased with the progress we are making on our operating model. Revenue at $147.2 million was in the middle of our guidance range of $145 million to $150 million. Compared to Q4 2010, revenue declined 12%. This decline mainly reflects the already well-understood impact of revenue from Barnes & Noble and Clearwire, which in total contributed $14.8 million of revenue in Q4 2010, compared to zero in Q4 2011. Partially offsetting this was a solid Q4 year over year growth in sales to PC OEMs.

Gross margin at 28.3% was slightly below our expectations when we set guidance for Q4. During Q4, we made an inventory adjustment of approximately $800,000 to provide for obsolete inventory. This adjustment negatively affected gross margin by about 0.5%. FX and a greater mix of Mobile Computing sales versus higher-margin M2M sales, had a further $600,000 or 0.4% negative impact on GM.

Non-GAAP operating expenses continued to decline in Q4, reflecting our intense efforts on managing our expenses. At $38.3 million, OpEx is down $4.9 million or 11% compared to the fourth quarter 2010, and down sequentially from Q3 2011, as well although the sequential decline is largely due to favorable FX rates. We are pleased with the progress we have made in reducing OpEx and are happy to see it below $40 million for the second quarter in a row, a target that we have been working towards for quite some time. Q4 non-GAAP earnings from operations were $3.4 million, that's above our guidance range of $1.5 million to $3 million, although down from $5.8 million in Q4 2010. And non-GAAP EPS was $0.08, within our guidance range of $0.05 to $0.10, however, below the $0.16 we reported in Q4 2010.

Moving on to our GAAP/non-GAAP reconciliation for Q4, we report our financial results in accordance with US GAAP, however we also present non-GAAP results in order to provide a better understanding of our operating performance. In Q4, expenses related to purchase price amortization, stock-based compensation, the write-off of an intangible asset, and restructuring costs totalling $15.8 million, were added back to our GAAP earnings from operations, to get a non-GAAP earnings from operations of $3.4 million. These adjustments are consistent with what you've seen in previous quarters, with the exception of the $11.2 million write off of an intangible asset.

This write-off mainly relates to a 3G protocol stack development project which was under way at Wavecom prior to the acquisition, and was set up as in-process R&D asset on our balance sheet at the time of the acquisition. We have now made the decision to abandon the project, it simply does not fit with our road map going forward and consequently we have written off the asset. This has no impact on our current or future operations.

During 2011, we made solid progress on improving our operating model. Starting with gross margin, we realized a noticeable improvement in the second half of the year compared to the first half of the year. These improvements were driven by ASP discipline, product cost reductions, manufacturing cost reductions through consolidation of production facilities and improved operations costs. These initiatives continue, and we believe further improvements in gross margin during 2012 are achievable. Similarly, our efforts to reduce operating expenditures are paying off. Our fourth-quarter non-GAAP OpEx at $38.3 million was well below our target of $40 million per quarter, and well below where we began the year at $43.2 million. Improving gross margin at a lower quarterly OpEx resulted in a solid return to profitability in the second half of 2011, compared to losses in the first half of the year. The combination of improved gross margin and lower OpEx also provides us with good operating model leverage as we grow our top line.

Turning to the balance sheet, our financial capacity remains strong. We generated $10 million of cash during the quarter. Cash flow from operations was $15.1 million, which included $8 million of positive working capital changes, largely driven by a considerable reduction in inventory. This was partially offset by capital expenditures of $2.9 million, and the purchase of approximately 280,000 Sierra Wireless shares by the restricted share unit trust, RSU trust, for a total of $2 million. The result was a net increase in cash during the quarter of $10 million, and leaves us with a balance of $110.7 million or $3.54 a share. Now, mid-December, we received approval for normal course issuer bid by the TSX to buy shares back. As per our normal trading black-out period, the window since that has been closed so we have yet to commence purchases under this program.

Moving on to guidance. We're providing guidance on a non-GAAP basis. In the first quarter of 2012, we expect revenue to be relatively flat compared to the fourth quarter of 2011, which is consistent with typical seasonal patterns. We expect gross margin to increase, returning to approximately the same level experienced in the third quarter of 2011, and this is driven by certain product cost reductions which we expect to realize in Q1. And finally, we expect operating expenses to increase slightly on a sequential basis from the fourth quarter of 2011 as we enter what is typically a more active quarter in terms of marketing expenses and normal seasonality in Q1.

This guidance reflects current business indicators and expectations. Inherent in this guidance are risk factors that are described in greater detail in our regulatory filings. Our actual results could differ materially from those presented. All figures are approximations based on management's current beliefs and assumptions.

Thank you, Dave. Summarizing our Q4 and full-year 2011 results and outlook. 2011 was a challenging year operationally. We faced headwinds driven by the loss of two large customers, and our LTE revenue ramp started later and went slower than expected. In spite of these difficulties, we made strong progress on strategy and program execution, which we believe has strengthened our market position and opportunity set.

In M2M, we built on our number one position in the market, growing core M2M revenue by 9%, securing many new design wins in key segments, and launching innovative new products. We also continued to make strong progress at expanding our position in the value chain, winning large solution programs with OEMs, and integrating our AirVantage cloud perform with more operators. We believe these achievements put in us in a great position to continue to expand our share in the growing M2M market, while building a more defensible, profitable enterprise over time.

In Mobile Computing, we established ourselves as a clear 4G leader with mobile network operators. Launching several new 4G products into the market, and strengthening our channel share position. As our operator customers continue to roll out new LTE markets, I believe we're well situated to be a direct beneficiary. Our PC OEM business also continued to pick up steam, driving strong growth, earning new design wins, identifying new growth opportunities, and launching new products.

In Q4, we also experienced a continuation of the operational gains we made in Q3. Our gross margin was solid, and our cost structure further streamlined, resulting in a fundamental improvement in our operating model. We believe that our improved operating model, combined with the expectation of continued steady growth in M2M, plus attractive growth opportunities in Mobile Computing, will lead us to stronger results in 2012 and beyond. And, Martina, that concludes our prepared remarks. You can now open the line up for questions.

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

Jason, I just want to touch base on the sequential guidance that was flat, a little better than our expectations. Can you give us a little color, is it any business units doing better than others or is it relatively consistent across most your product lines?

I would call it fairly consistent, Mike, kind of flattish in both lines of business. And I think that reflects fairly typical seasonality.

Okay. Great. Now that's helpful. Jason, just kind of a bigger picture question for you. The M2M market, I know it is lumpy quarter-to-quarter, maybe just longer to medium-term view. Just a couple of dynamics, and there's a lot of things coming together on the ecosystem to help the market grow. But on the flip side, at CES you saw some larger OEMs starting to show their first end to end solutions, maybe justifying a longer-term market size. Can you help us balance those, given you have a leadership position, and how you see competitive dynamics longer-term, versus the longer-term growth in the market?

Sure, I think our view -- we play across the value chain, first of all, in Machine-to-Machine. I would say that we face the ecosystem in kind of three areas of the Machine-to-Machine value chain. So in embedded modules, yes, there doesn't seem to be a big change in the ecosystem there, certainly in terms of the competitive landscape.

We had one pretty significant potential competitor exit in Ericsson, and there are some pretty clear leaders in that space right now, including us, and others like Centurion. So I don't see any big shifts there, at least as far out as we can see. And our view is that the segment has a lot more attention, visibility, more investment from big players like operators, et cetera.

With respect to what we call our solutions and services business, there are a number of perhaps competitive cloud platforms. Ours, we believe it's very favorably positioned in the market. We have made some really good progress connecting it to operator networks. We've now got some pretty good end-user traction, and I think we're in a unique position to really offer all the elements to an end-to-end solution. So, I think that positions us well.

I think overall I would say, in spite of what might happen on a quarter-to-quarter basis, I think the market has a lot of good growth drivers pushing on it. There's some headwinds, of course, in markets like Europe but some really good growth drivers, particularly in the area of mobile network operators, continuing to focus a lot of time, attention and investment in the area. I think that's going to be a very positive impact to the overall growth of the market, and I think we're well-positioned to benefit from that.

Okay. Great. That's helpful. Maybe just build on that, question for Dave, also. Obviously, in the first quarter, we had CES and Mobile World Congress, so should operating expenses kind of bump back above $40 million and maybe trail down after those big conferences on the OpEx line?

And then on the gross margin, encouraging that you think they can continue to improve into 2012. It was kind of my spot in the model that maybe the Mobile Computing might go faster with LTE momentum and I would assume those are lower gross margins. Can you help me balance those thoughts?

Dave, here. On the OpEx side, you're right, Q1 tends to have some seasonal drivers. Marketing is up for the reasons you suggested. It is a lot of trade show support like CES, and World Mobile Congress is an example. So, those numbers tended to go up a little bit.

We also have some, as you tick over the year, there is some staff compensation increases, things like that, that build in a little bit higher costs versus Q4. So, that plus some other seasonal things tend to see OpEx tick up a little bit in Q1 versus Q4. With respect to gross margin, we have solid visibility on product cost reductions that we expect to begin realizing in Q1 here, that gives us confidence that we should see improvements in gross margin. And we believe those improvements to be sustainable.

Great. Thank you. I look forward to seeing you guys at the Barcelona Mobile World Congress in a few weeks. I'll pass it on to the next person.

Your next question comes from the line of Paul Treiber from RBC Capital Markets. Your line is open.

What percentage of the PC OEM was Ericsson? And how much of that share do you think you can pick up in 2012?

Well, it is tough to put a number on it, Paul. But Ericsson, our view Ericsson was the volume leader in PC OEM, and probably Sierra Wireless and Novatel, numbers two and three, not sure of the order of those either. But Ericsson, in our view, was the clear volume leader, also the price leader by a considerable margin. So I think that equals a pretty fundamental favorable ecosystem development for us, and for that matter for Novatel.

With respect to what kind of share we can pick up, I think we'll probably see in our view I think we have obviously share gain opportunity, but I don't think that's going to result in a meaningful revenue bump, the share gain, that will. We don't think the share gain is going to result in a significant revenue bump until 2013. So, our opportunity now is to -- is to capture new design wins with current and soon-to-be former Ericsson customers, and to get those programs to market probably in early 2013, and I think that's where we see -- the benefit of the shift in the ecosystem.

Okay. And then regarding LTE AirCards, you mentioned previously that carriers were focused on marketing and promoting LTE SmartPhones. But then recently, HTC indicated they're seeing slower sell-through of LTE SmartPhones. Do you think, in light of that trend, do you know carriers will refocus marketing back on to LTE cards and hot spots?

It is hard to say and frankly, I think that differs from operator to operator. If you look at Telstra's launch as an example in Australia, it was a very aggressive launch and lots of investment in various forms of advertising, and really taking advantage of what they view as a key competitive differentiator, and a lot of that advertising and push featured our class of products, which is obviously very encouraging to see.

In the US, I would say it's probably, with our US customers, probably not quite as aggressive for our class of devices, but we are seeing some very good solid, what I would call grass roots efforts, so in the channel, in stores, educating salespeople, and that seems to be a pretty aggressive push. What we haven't seen yet and don't expect to see in the short term is national television advertising.

Okay. And then just lastly, on AirVantage, the revenue jumped quite a bit quarter-over-quarter. Can you help explain what is going on there. And is that recurring revenue, or are there some one-time impacts in there?

Yes, I think with respect to AirVantage revenue, certainly we did add some recurring revenue, as we ramped up a couple of our larger customers. But a lot of AirVantage revenue right now is coming from NRE, so integration projects with specific customers.

So that can be lumpy, quarter-to-quarter, because NRE milestones and revenue recognition just comes in like that. Right? So you're going to see that in the AirVantage line, I think, for the coming, for the next several periods before we build up a solid base, a larger base of recurring revenue from that platform.

Okay. Thanks a lot.

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

Firstly, on Ericsson, if I could. So, I don't know if this is what you meant in your answer, but you called them the volume leader, so bigger than Sierra, was my takeaway. So, is this at least $300 million, $400 million worth of business that needs to be split into the market?

No, I think you're probably high, Todd.

Okay. Okay. So couple hundred million. And is this mostly European carriers where you'll have to go out and get the design wins?

Well, they're what I would call global OEMs, so some of those are North American-based, some of them are based in Asia. But, yes, they are primarily for European deployments. So, where we where we saw Ericsson be particularly strong was in HSPA plus, so 21 megabit per second deployments.

That is generally speaking good enough for most of the -- most of the European markets. So, when laptop OEMs launch there embedded solutions, typically they're looking for a 21 megabit per second solution that is priced right, and Ericsson delivered there. That is where we do see the opportunity for most of the share gain.

Okay. My second question had to do with sort of substitution of SmartPhones and apps that create hotspots, et cetera. What do you think the impact of those has been on the market, and the take-up of the LTE products?

We're going to sound like a broken record on this, Todd probably, but it is clearly a factor but it's also hard to measure it. We think that it is a potentially disruptive threat, obviously, to things like dedicated mobile hotspots. Going the other way, there is a favorable trend in more people carrying more and more Wi-Fi-enabled devices, which is a great case for having a dedicated device. And we're also seeing what we view as potentially favorable trends with more and more group data plans being discussed, and, probably, in the reasonably near-term being launched by major operators. So, family or group data plans I think is a positive driver.

And I think as you look at all these more and more Wi-Fi-enabled devices, a key part of the justification to having a dedicated device is power management. You're going to need a large dedicated battery to support those applications that are being worked by several people on a single device. If you do that on your phone, pretty soon your phone is going to run out of juice and you won't be able to make the next phone call.

There is a number of different factors, I guess, is what I'm saying there. It is certainly potentially disruptive but there are positive factors happening, as well, that we feel justify and give strong support to a dedicated mobile hotspot device.

And last question, if I could. In terms of LTE promotion by the carriers, you said no TV plans for Q1. Do you have visibility into Q2, and what their plans are?

No, not yet, Todd.

Okay. Is the fair to expect more aggressive advertising in Q2, or is it just too early to tell at this point?

The way we think about it is, as new LTE markets light up as new LTE markets open up and service is available, that's going to turn on promotional activity. And that promotional activity is going to be focused clearly in the new market, right? And you don't see a lot of that, because it is not national in nature, but promotional activity that happens in those new markets is real, and does result in a push. And whether or not that bubbles up into a national campaign, it is kind of, we're in wait and see mode on that.

Okay. But there should be incremental bumps to your business if we sort of track along with the, for example, AT&T's targets on the various markets they're hoping to light up?

Well that's the way we're thinking about it. We're a bit cautious on it obviously, because we've had a disappointing Mobile Computing run until just recently, but we're certainly cautiously optimistic that as new markets come on line, that equals increased opportunity for us. Our products are now favorably positioned in the channel. We should benefit from that.

Okay. Great. Thank you very much.

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

A couple of questions. I didn't see it in the press release, but can you give us the actual PC OEM revenues in the quarter?

Dave, do you have that handy?

Yes, sure do.

And I guess I'll go to the next one while he's looking that you up. The inventory on your balance sheet was down pretty dramatically in the quarter. Was that planned, or was that a reflection of some of the supply constraints that you have had?

To answer your other question, it was $11 million in the fourth quarter.

Okay. And in terms of the -- your inventory levels?

I missed that. So, the decline in inventory?

Yes.

Yes, so you will recall we built a sizeable chunk of inventory in the middle part of the year, and that's now working itself out, and we're down to $60 million at year-end on our books, our contract manufacturer also holds some inventory, as well. But we've moved a good chunk of that inventory back out through the channel. I will say, though, that's looking pretty low and I would expect that number to increase in Q1.

I was wondering if you could give us more details, Jason, on the supply constraints that you were referring to, that impacted the M2M business specifically in Q4.

They're actually fairly broad-based. So, I know everybody wants to talk about Thailand. Thailand was a bit of a factor. It wasn't the only factor. We source a couple of components from factories that were affected by the Thailand floods.

But we also had factory capacity constraints, quite candidly. We had some customers who surprised us to the upside with demand, and we didn't have the factory capacity to address that. So, it's kind of a mix of factory capacity and components, and I would say a significant part of the component constraints came as a result of the floods in Thailand.

Great. And then last question, on the Ericsson exiting the embedded module market. Obviously, they're a big player in the PC OEM business. Where are they in relative to kind of you and your leading competitor, in some of the industrial end markets that you sell embedded modems into?

They haven't been a factor, really. They have been, I guess, more of a threat is the way I would put it, Tavis. They were certainly taking a price leadership position and that was catching the attention of the some of the bigger players in the ecosystem who call them up at low prices.

But, having said that, our view is that didn't result in a lot of design win success for Ericsson. So, I would say it's not a big impact. Maybe a slight favorable impact having them exit to our M2M business. A much more significantly favorable impact on a going-forward basis to our PC OEM business.

Got you. And given all of the new product launches in Mobile Computing in the back half of the year with LTE, I take it from your Q1 guidance you're reasonably pleased with both the level and state of channel inventory at your large customers right now?

Yes, we are. First of all in the quarter we saw good broad based activity from our three big operator customers and we also saw pretty good sell-through. I mean, we don't get perfect information on sell-through, but reported sell-through was good. It was solid, resulting in very reasonable channel inventory. So, our expectation is as long as they can keep demand coming in, then that's going to result in revenue growth for us.

Great. Thanks a lot.

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

Just a little more insight, please on Clearwire and Sprint. And I was just wondering if you might see a transition from some Clearwire customers to Sprint product, and also curious about the timing of that tri-mode product launch and when you might expect a transition of product there? And what sort of ordering pattern you might expect through the course of the year, given that prior transition?

Sure, sure. So I would say, first of all, with respect to your first question, a transition of Clearwire customers, if you will, to being Sprint customers, yes, we're certainly not counting on that, is the way I would characterize it. If it happened it would be a nice surprise upside, is the way I would think about that.

With respect to our tri network device at Sprint, we haven't talked about specific launch dates, although Sprint has certainly messaged that they plan to start rolling out LTE service in mid-2012. So clearly, the availability of the tri-network device needs to align with that. So, that gives you rough timing on that, as soon as Sprint starts launching LTE markets, we need to be there.

So is it fair to assume that they would start weaning inventories, maybe through the June quarter of the current mobile hotspot?

The current mobile hotspot? Yes, I think -- our view on that is, demand continues to be continues to be solid, and channel inventory is at a reasonable level. So, our expectation is that demand will continue, and that we'll be continuing to shift to meet that demand. It's hard to give that precision on the time frame, but clearly once we launch the tri-network device, there will probably be some kind of transition over time between those two products.

But I think that's probably going to be a long transition, as well. The tri-network product is quite a specialized product. It's not an inexpensive product, because it has a lot of functionality in it. So, I think there is probably going to be a place in the channel for our current dual-mode product for some time.

Okay. Fair enough. A little on the M2M side. You mentioned 10 auto platforms that haven't launched yet. I'm kind of wondering if that's what you expect to drive an acceleration in Machine-to-Machine revenue through 2012 versus 2011, given the 9% or so that you posted last year?

No, I think -- I'll also point out over the past three years, 19% CAGR, right? I think our expectation for steady growth from Machine-to-Machine is certainly intact. We talked a lot about roughly a 15% year-over-year growth rate. We didn't quite hit that in 2011, but if you open the window a bit more, we're well above that at 19%. So, it may not be a perfect 15% every quarter, every year, but I think that's a reasonable expectation over the long-term.

With respect to what's going to drive that, yes, we do think automotive is going to be a key driver. We had excellent growth in 2011 in automotive. I think we'll have continued growth in 2012, but I think our bigger growth ramp with automotive starts in 2013 and in 2014, as these programs roll out.

The automotive design wins are a long-time in gestation. But when they do go to start-up production, many of them will be significant volume runners. So, we've been pretty consistent in our expectation out of automotive in about three years' time is that it will be $100 million-plus business, and I think we're on the right trajectory, and I think given our program pipeline, that gives us quite a bit of confidence in being able to get there.

Can you speak to anything that you might expect to contribute to M2M growth this year, something that we should look for going forward? Anything more specific than--

Yes, well I think part of it will be automotive. So, we definitely will launch new automotive programs this year. So, that will be a contributor.

So one or two, maybe of the 10 that you referenced?

That's right. Yes, that's right. I would say one or two of maybe the higher-volume ones, and probably a couple of the smaller ones, as well. So that -- our view is, that will contribute to M2M growth this year, probably more weighted to the back half. And in addition to that we've got -- I mean literally dozens of new other programs in the pipeline from other industries. M2M is the stuff of literally hundreds of customers, right? So, each new program we win gets put in the pipeline, and those new programs will get launched over time.

Okay. Last question, just on Windows 8 and the Ultrabook drivers that you discussed. I was wondering if you could just peel that back a little bit, and go in a little deeper. Are there specific items within those technologies, or those platforms, that tend to lend themselves better to a Sierra module?

As opposed to doing it on their own, the OEM doing it on their own?

Yes, either that, or competitors.

Yes, I think -- well, first of all I think that LTE is certainly a theme with a lot of the opportunities we're seeing. So, the fact that we've got a very well-established LTE embedded module lineup and road map, is a big competitive differentiator compared to a lot of the other guys in this space. Obviously, we're not alone. We have competition.

But we certainly have a much more robust LTE product lineup than most for PC OEMs, and I think the Windows 8 initiative requires some pretty heavy lifting on the software side, frankly, and that's something that we've been hard at work doing, including a very close collaboration with Microsoft. So, we feel like we're probably ahead of most players with respect to Windows 8 support.

And then, thirdly, I would point out that these platforms are -- they're very small, they're very thin, and requires different form factor solutions, probably, to maximize success. And that's another area where we've been doing a lot of work. And I think customers are reacting favorably to what we're proposing, as thin form factor solutions.

And so if you look back at the PC OEM business, in 2011, and were to draw some comparisons on what you expect this year and -- well obviously, you made it pretty clear that Ericsson is out and you should see the benefit of that in 2013. I was wondering how you might characterize 2012. Would you expect to see sort of those revenue -- those quarterly revenue prime numbers that you've seen in that 2011 and 2012 range going through this year? Or do you expect it to kick up a little bit?

I'm going to be careful to avoid being precise. But, no, we do expect growth out of PC OEM in 2012.

Okay. Jason. Thanks very much. And thanks for indulging me.

(Operator Instructions). Your next question comes from the line of Sera Kim from GMP Securities. Your line is open.

I'm want to follow up on that PC OEM question. I'm just wondering, the growth that we saw in Q4, does that reflect the design wins you have been talking about in the past, or do we have yet to see the higher volume ones later this year?

It does reflect some contributions from design wins we have been talking about in the past, but in our view, not up to 100% of the potential volume ramp.

Okay.

I don't know if that helps you. But more -- we are expecting a few more platform launches and we are expecting some more products to come into the -- come into the market.

Okay. That's helpful. Thank you. And for M2M, the design wins that you won during the quarter that you were talking about earlier in the call, would you be able to give us more color in terms of what end markets both of those wins were? I'm just trying to get an idea of the timing of the ramp. I know with automotive, it takes several years. I know some others, it ramps up a bit quicker.

One of the customers we did mention, Axia, is an automotive, Tier 1 automotive supplier, and in fact they bought a business from another Tier 1 called Autoliv in Sweden, and they have been a pretty significant supplier to French carmakers, and carmakers located in the Nordics. That's a good relationship. They do have customer wins based on the platform they've designed with our module inside.

Gorlitz, that is a smart-metering solution manufacturer, and they are targeting programs all over the world with a focus, of course, in Europe. Some of our other smart-metering customers have recently won new programs, so we expect to see some activity on those programs throughout 2012.

There is really a lot to talk about there, Sera. But probably the one area that will probably be more visible than others is networking. So we've done a lot of work with Cisco, NETGEAR, Netcom, Cradle Point, Landcom in Germany, and a number of others. And all of those guys are chasing some pretty interesting opportunities including wireline replacement opportunities in Europe and in North America. And I think that's a very tangible and possibly short-term opportunity.

Okay. Great. So, these opportunities that you're talking about, it seems like they're heavily weighted into Europe, and you mentioned in the quarter you saw some weakness because of Europe. What is your visibility in the European region?

We generally have fairly good visibility. I think where our visibility gets weaker is when it gets into distribution, so broad-based distribution, where it is difficult for us to see the end customer programs. And that's really where we saw the weakness concentrated, in distribution.

And that, to me, speaks of perhaps general weakness, not specific program weakness, but some general weakness. Other more visible customers, who are engaged in known automotive rollouts, as an example, we didn't see any impact.

Okay. That's helpful. Thank you. And just last question. The Q4 shortfall for M2M, how much of it was related to the supply chain constraints versus FX?

We saw that business was constrained by about $2 million on supply relative to demand. $2 million to $3 million on supply relative to demand. And we were impacted by about $1 million.

Sequentially from Q3 on FX was about $1 million.

Right. That's a good point. We factored in some -- when we gave guidance, Sera, we did factor in some assumption for FX change, but not all of it.

Probably about relative to our guidance forecast, FX probably had about a $400,000 negative impact.

Yes. Okay. That's helpful.

Okay.

Thank you very much.

There are no further questions in the queue. I turn the call back over to the presenters.

Okay. Great. Thank you, Martina. Thank you, everybody, for joining today's call. As is usual management is available here in our Richmond office if you have follow-up questions. Martina, I think that concludes today's call.

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