司亞樂 (SWIR) 2012 Q1 法說會逐字稿

Welcome to the Sierra Wireless first quarter results conference call and webcast. Currently, all participants are in a listen-only mode. Following the presentation, we will open up the floor for questions. Instructions as to how to register for a phone question will be provided at that time. Please note that this call is being recorded today, Thursday, May 3, 2012, at 5.30 p.m. Eastern Time and 2.30 p.m. Pacific Time.

I would now like to turn the meeting over to your hosts, Mr. Jason Cohenour, President and Chief Executive Officer of Sierra Wireless, and Mr. Dave McLennan, who is the Chief Financial Officer. Please go ahead, gentlemen.

Good afternoon, everyone, and thank you for joining today's conference call and webcast. With me today on the call is Jason Cohenour, the Company's President and Chief Executive Officer.

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. Firstly, Jason will provide a general business overview, and then I will cover the first quarter 2012 financial performance in detail, as well as guidance for the second quarter of 2012, and then Jason will return for some brief summary comments and Q&A.

But before we get started, I'd like to reference the Company's safe harbor statement. A summary of the safe harbor statement can be found on page 2 of the webcast, which is now being displayed. Today's presentation contains certain statements and information that are not based on historical facts and constitute forward-looking statements. These statements include our financial guidance summary for Q2 2012 and commentary on our outlook and business drivers.

Our forward-looking statements are based on a number of material assumptions, including those listed on page 2 of the webcast presentation, which could prove to be significantly incorrect, and our forward-looking statements are subject to substantial known and unknown material risks and uncertainties. I draw your attention to a longer discussion of our risk factors in our Annual Information Form and Management's Discussion and Analysis, which can be found on SEDAR and EDGAR as well as our other regulatory filings.

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

With that, I'd like to turn it over to Jason for the business overview.

Thank you, Dave. I'll start with a high-level summary of our first quarter 2012 business highlights.

Q1 was a very solid quarter for Sierra Wireless. We saw broad-based strength across our lines of business, including steady M2M growth, strong growth with PC OEMs, and continued solid demand for our 4G AirCard products. This broad-based strength, combined with continued operating model improvements, drove financial results that were considerably above our expectations.

Revenue grew 4% on a year-over-year basis to $150.3 million in the quarter, above our guidance range of $143 million to $148 million. M2M and Mobile Computing each contributed to the revenue gains, with both lines of business delivering year-over-year growth. Excluding the impact of Clearwire and Barnes & Noble in the first quarter of 2011, year-over-year revenue growth was 11%.

As expected, non-GAAP gross margin improved to 29.8%, up significantly from the 27.4% we reported in the first quarter of 2011. Our gross margin improvement was driven primarily by product cost reductions and continued ASP discipline. Non-GAAP operating expenses of $39.7 million were down $3.5 million on a year-over-year basis and in line with our expectations.

Strong revenue, improved gross margin and good cost control led to better than expected non-GAAP earnings from operations of $5.2 million and non-GAAP EPS of $0.16, which is well above our guidance range of $0.06 to $0.10 a share, and well above the $0.08 we reported last quarter.

Overall, I'm very pleased with our Q1 results and trajectory. Q1 represented our fourth quarter in a row of steady improvement in our operating results. We've strengthened our operating model and have good visibility to growth drivers in both M2M and Mobile Computing.

Additionally, I believe that we continue to strengthen our relative strategic position in both lines of business and are on track to deliver long-term sustainable growth and shareholder value.

Taking a closer look at our Mobile Computing line of business, Q1 was a solid quarter with revenue of $73.3 million, up 3% from the first quarter of 2011. Excluding the impact of Clearwire, Mobile Computing revenue was up 16% on a year-over-year basis.

Revenue from PC OEMs was up sharply again on both a year-over-year and sequential basis, and was the key driver of our overall Mobile Computing growth. During the quarter, we experienced solid contribution from a broad range of PC OEM customers, including NEC, HP, Fujitsu, Lenovo, and Panasonic. Revenue contribution from Japan was exceptionally strong in the quarter, as one of our OEM customers deployed a large enterprise rollout with their LTE-enabled notebooks.

We continue to view the PC OEM market as a growth opportunity and see LTE, Windows 8 tablets and Ultrabooks as important catalysts.

In AirCards, we continued to build on our 4G leadership position with key existing partners, while also adding new customers. Our top line -- our lineup of 4G AirCard products continued to perform well at AT&T, Sprint and Telstra, and reported sell-through was strong. We believe that we continue to have a strong leading channel share position with each of these key accounts.

During the quarter, we also experienced significant new product and new customer launch activity. We recently launched our latest 4G LTE mobile hot spot, the AirCard 760, with Telstra. Telstra plans to bundle the 760 with our new AirCard hub accessory, which transforms the AirCard 760 from a mobile device to a powerful four-port Ethernet router solution for homes and small offices. During its first month, the 760 has received excellent reviews, including an Editor's Choice award from PC World magazine in Australia.

We also introduced our unique Tri Network mobile hot spot with Sprint at the CES show in Las Vegas. The Tri Network mobile hot spot is designed to enable Sprint to elegantly transition customers to its new LTE service as their Network Vision initiative continues to roll out. The Tri Network hot spot supports LTE, WiMAX and EVDO in addition to WiFi. We expect Sprint to launch this product in Q2.

Product launch activity with recently added customers was also high in Q1. During the quarter, we launched new 4G LTE AirCard products with Rogers in Canada, DNA in Finland, and Net Index, a DoCoMo virtual network partner in Japan.

Looking forward, we're optimistic about the growth prospects in our AirCard business. Our outlook is supported by a strong channel position, robust 4G product pipeline, a growing number of new LTE markets, and new customer launches.

Moving to Machine-to-Machine, Q1 was another quarter of steady growth in our M2M business. Despite continued headwinds in Europe, revenue grew to $77 million, up 6% from $72.7 million in the first quarter of 2011. Our stronger than expected revenue was driven by broad-based demand across our key segments, including automotive, energy and networking, plus higher than expected demand in North America and Asia. Excluding the impact from Barnes & Noble in 2010, Q1 represents a record revenue quarter for our core M2M business.

During the quarter, ABI Research published its 2011 M2M market report, validating our global market share leadership position for the second year in a row. According to ABI, our M2M revenue in 2011 of over $290 million represented market share of just over 30%.

While we're pleased to have our leadership position validated, we're far from done. We're continuing to invest in building on our leadership position and in expanding our position in the M2M value chain.

An important element in building on our leadership position is the launch of new products, which enables us to defend our position, penetrate new markets and bring new capabilities to customers. During Q1, new product activity was high. We launched the new AirLink GX440 on the Verizon LTE network. The GX440 is our new flagship platform in the AirLink family of rugged, intelligent gateways. The GX is a versatile solution addressing the needs of a broad range of M2M segments and, with 4G LTE capability, supports many mission-critical applications that demand an instant-on, high bandwidth connection.

We also announced that our highly successful Open AT application framework for AirPrime modules is now available on our 3G devices. Open AT provides a rich, integrated development environment complete with APIs, prepackaged software libraries, and tools, which enable developers to create applications that run directly on our AirPrime-embedded modules without the need for a dedicated application processor. Developers can now leverage our proven Open AT application framework, which is already deployed on millions of our 2G devices, to port their existing applications to our 3G products or to create new solutions.

During Q1, we also experienced continued design win momentum. Design win activity was particularly high in our key markets of automotive, energy and networking. We also secured significant design wins with industrial hand-held OEMs. Such design wins are important milestones, as they validate our strategy while building a strong pipeline of customer programs to drive future revenue growth.

We also saw key customer deployments that validate our traction in expanding our position in the M2M value chain. Schneider Electric, a global leader in energy distribution and management solutions, announced the launch of their OptiM2M solution in France. OptiM2M is built on our AirVantage cloud platform and delivers Schneider customers a ready-made machine monitoring solution for high value assets such as HVAC systems. Using OptiM2M, Schneider customers can be instantly notified of alarms, track machine usage, and even perform preventive maintenance. Schneider plans to launch OptiM2M in additional European and North American markets in the coming months.

Now, as stated on previous calls, our goal in M2M is to become the end-to-end 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.

Nespresso, a global leader in high quality single-serve coffee, is taking full advantage of our end-to-end platform vision. Nespresso is embedding AirLink programmable gateways into their coffee machines and using our AirVantage cloud platform to capture critical coffee consumption and machine data. Using our platform, Nespresso aims to deliver an even higher level of service to its customers, including proactive machine maintenance, advice on machine parameters to create the perfect cup of coffee, and more timely delivery of coffee supply.

In our view, both Nespresso and Schneider provide important proof points that our strategy to expand our position in the value chain is working. Our end-to-end platform solutions are enabling customers such as these to build and deploy their M2M applications faster and more efficiently. We believe this puts us in a very strong position to capture more market share and more value from each connected device.

Overall, I'm very pleased with our progress in M2M. We're the clear market leader, and we're building on our position. We're executing well strategically and operationally, and we're seeing the results in customer design win momentum and revenue growth.

And with that, I'll now turn the presentation over to Dave, who will take us through a more detailed look at first quarter results and guidance for the second quarter.

Thank you, Jason. We report our financial results on a US GAAP basis. However, we also present non-GAAP results in order to provide a better understanding of our operating performance.

Q1 was a very good quarter for us. We experienced continued improvement in profitability and delivered significantly better financial results than we expected to when we set guidance for the quarter.

Starting with our GAAP results, we were essentially break-even at EPS of $0.01 per share. This compares to a GAAP loss of $0.25 per share a year ago.

On a non-GAAP basis, our results exceed guidance for all of the metrics. Revenue of $150.3 million was ahead of our guidance range of $143 million to $148 million. Earnings from operations of $5.2 million was above our guidance range of $2.5 million to $4 million. And net earnings of $5 million, or $0.16 per share, was above our guidance range of $2 million to $3 million, or $0.06 to $0.10 per share.

I note that in addition to the better than expected earnings from operations, our net earnings and EPS were also positively impacted by some favorable adjustments and tax allowances, which resulted in income taxes being effectively $0 in the first quarter. Relative to guidance, this benefited EPS by approximately $0.04 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, and foreign exchange gains or losses on the translation of certain balance sheet accounts.

Looking at revenue growth and line of business mix for the first quarter of 2012, we experienced solid year-over-year revenue growth of 4% to $150.3 million. We saw broad-based strength across our lines of business, including steady M2M growth, strong growth with PC OEMs, and continued solid demand for our 4G AirCard products.

In the first quarter of 2012, our M2M business accounted for 51% of total revenue, while our Mobile Computing business accounted for 49% of total revenue. AT&T and Sprint each accounted for more than 10% of total revenue in the quarter, and in aggregate contributed 29% of our revenue.

We continued to make good progress in improving our profitability. Good revenue growth in the quarter, combined with improved gross margins and good cost control, drove non-GAAP earnings from operations to $5.2 million, up from a loss of $3.6 million a year ago and up 55% sequentially from Q4.

Non-GAAP gross margin as a percentage of revenue improved to 29.8% in the first quarter. That's up from 27.4% a year ago and up from 28.3% in the fourth quarter of 2011. This improvement in gross margin was driven by continued progress in product cost reductions. On a segmented basis, M2M gross margin was 32.1% and Mobile Computing was 27.3%.

As expected, Q1 operating expenses of $39.7 million were up slightly from the $38.3 million we reported in Q4 as a result of some seasonality as well as some new product launch activity. On a year-over-year basis, Q1 2012 OpEx was down $3.5 million compared to the $43.2 million we reported in Q1 2011.

On an EPS basis, non-GAAP earnings were $0.16 per share, up from a loss of $0.08 a share a year ago and up substantially from the $0.08 we reported in Q4 2011.

Turning to the balance sheet, our financial capacity remains strong. During the quarter, we consumed approximately $3.9 million of cash. From an operating perspective, we were cash flow positive, generating $5.1 million of cash during Q1. This was mostly offset by CapEx of $4.4 million during the quarter, which included [tooling] and test equipment as we ramp up our 4G production capacity.

Cash usage was further driven by the purchase of our own shares in the amount of $4 million during the quarter, including $1 million to fund our restricted share unit trust, which purchased 133,000 shares, and $3 million to purchase 400,000 shares under the share buyback program we announced in December of 2011.

Moving on to guidance, we're providing guidance on a non-GAAP basis, which excludes stock-based compensation expense, acquisition amortization, integration costs, restructuring costs, and foreign exchange gains or losses on translation of balance sheet accounts.

In the second quarter of 2012, we expect revenue to increase on a sequential basis to between $157 million and $162 million, driven primarily by growth in revenue from our 4G AirCard products. We expect gross margin to improve slightly and for operating expenses to increase slightly compared to the first quarter of 2012. We expect this to result in non-GAAP earnings from operations of between $8.5 million and $9.5 million and non-GAAP net earnings of between $5.7 million and $6.5 million, or diluted EPS of $0.18 to $0.21. Incorporated in this guidance is an effective tax rate estimate of 27%.

While excluded from our Q2 non-GAAP guidance, we expect to incur some restructuring costs over the next few quarters as a result of consolidation of our capability across various sites. This will result in the closure of our Newark, California facility effective December 31, 2012. Activities currently performed at our Newark office are being moved primarily to our Richmond BC facility. This decision was made to drive greater efficiency in R&D leverage. In total, we expect restructuring costs associated with this initiative to be approximately $2 million.

With that, I'll hand it over to Jason.

Thanks, Dave. So to summarize, we're very pleased with our results for the first quarter of 2012. Year-over-year revenue growth in both lines of business was solid, and we continued to experience improvements in our operating model, which is clearly driving earnings power. Our M2M business experienced steady year-over-year and sequential growth despite significant macroeconomic headwinds in European markets.

Our global market share leadership was validated once again, and we continued to build on our position with new design wins, new products, and demonstrable success in expanding our position in the value chain.

In Mobile Computing, our solid performance and outlook are underpinned by a strong 4G position with key operator partners, a robust product pipeline, new customers, and an expanding LTE opportunity. We're also seeing very strong growth with PC OEMS as well as new opportunities with Win8 tablets and Ultrabooks.

Looking forward, we expect to see continued improvements in our operating results supported by year-over-year revenue growth in both lines of business and further operating model improvements. And while we focus on delivering strong operational results, it will continue to drive our strategy forward with a goal of creating long-term, sustainable growth and shareholder value.

Operator, that concludes our prepared remarks. We can now open the line for questions.

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

You there, Mike?

Mike Walkley, your line is open.

Thank you. Sorry. Thanks, guys. Congratulations on the nice quarter, and great to see the leverage in the model here, so congrats on the OpEx leverage. I wanted to ask some questions just about the embedded laptop space. One of your competitors is indicating a tough time in that space and questioning the size of the opportunity longer term, but yet that seems to be an area of growth you highlighted. Can you just talk about the competitive dynamics in the embedded laptop space? And maybe also if you could comment on Ericsson getting out of the business and how that might be impacting the competitive dynamics. Thank you.

Yes, sure. Hi, Mike. This is Jason. So I think we probably talked a bit about Ericsson exiting the business last quarter, and that -- clearly, we're going to see that as a factor at some point in the future. But right now I think there is -- Ericsson customers are receiving continuity of supply. So our real focus is on, I would say, different areas, different markets, and the bulk of our PC OEM business is focused on LTE and multi-mode solutions, neither of which Ericsson provides.

So we seem to have established a good position for those specific market needs, first of all, and that's what's driving today's revenue of -- and it's not like it's huge, right? It's about $15.3 million in the quarter, but experiencing good growth nonetheless. And I think we've got a good collection of customers around there. It's not one, it's two -- it's several customers, and that's what's driving our growth more recently.

And I think probably something that's a bit extraordinary is we're seeing a lot of benefit out of our exposure to Japan, and that's as a byproduct of a long-standing relationship with DoCoMo as well as Japanese OEMs. And it seems to be working well in terms of new design wins and also big enterprise rollouts. Enterprise rollouts, I'll caution you, can be lumpy, but right now we're certainly seeing the benefit of that.

And then as we look forward, where we're playing, the sandbox we're playing in, we still see that as an interesting opportunity, as I said, particularly as we think about further expansion of LTE markets plus Win8 tablets, where I think we've carved out an interesting position given the upfront work we've done with Microsoft and on some new form factors that Win8 OEMs are finding appealing.

Okay, good. Thanks, Jason. That's helpful. And embedded in your guidance for Q2, is there any supply issues? There's been some worry in the industry about some short LTE supply over the summer. Is that impacting you at all?

We're always worried about supply on key components, but I wouldn't say it's a big theme for us in Q2. Yes, I think you seem to be alluding to possible constraints on base band or RF. I think right now, I mean, if you -- our worry shifts on a day-to-day basis, I'd say. If you picked my -- our key worry right now would probably be memory, and tomorrow it'll be something else. But right now we don't -- this is kind of a day-to-day struggle because there are -- there's competition for these components. But right now we don't see it as a big theme, and certainly our guidance contemplates some supply constraints on what would otherwise be higher -- against what is high demand. But we've constrained that demand to fit with what we believe is a reasonable expectation on our capability to secure the supply we need.

Okay, great. That's helpful. And Jason, just overall on the Mobile Computing business, it sounds like that's -- from your guidance, that's one of the areas for the growth next quarter. Is that -- can you maybe expand on sell-through rates? Is it more markets getting launched by some of your LTE customers? Is it the initial sell-in of your product for Sprint? Maybe just give us an update on kind of supply demand you're seeing and what's driving that nice growth sequentially.

Yes, yes, and it's a bit of a mix. We are seeing very good sell-through. The reported sell-through from our key operators was strong. Channel inventories seem to be in a good position. I would call them normalized, not unusually thin, not unusually heavy, and I think that creates a good environment for continued sell-in. Add to that new product launches, and you know that always helps in the early stages of new product launches, always helps with driving revenue.

I would add to that new customers, which is maybe something a little bit different you haven't heard from us in quite a while. We are adding a good solid handful of new customers. That's a driver, as are, to your point, the opening of new LTE markets.

Okay, great. And then I know you have strong share with a lot of these customers, but on -- it's hard to give longer-term guidance, but anything that would change kind of seasonal patterns in that business? Or is Q2 unusually strong for any reasons, or is that just kind of a nice improvement and the back half of the year could continue to improve off these run rates?

Well, we're going to be -- as you know, it can be a volatile business. We're going to be careful not to get too far ahead of ourselves. But right now I would say we're feeling optimistic. So I think our -- we've evolved from being concerned to cautiously optimistic to optimistic, and that's certainly reflected in our Q2 guidance. Looking out beyond that, it's tough to tell. In a couple of these channels, as I'm sure you know, we have unusually high share is the way I'd characterize it. So I -- thinking logically, I don't think that can last forever, but at the same time, we're adding new customers, so we're feeling pretty optimistic about that space right now.

Okay. Thanks, Jason. I'll ask one more question and pass it on. Just on M2M, thanks for sharing the ABI data of over 30% share. It came in a little stronger than expectations in Q1. I know this is a more stable business, but some other M2M players have had a challenging beginning of the year because of Europe. So just in the terms of the growth in this business and as you see the competitive dynamics, could you just update kind of how you see the competitive dynamics and where you think share could get to and how we should think about growth over the next year? Is it still kind of a 15% longer term CAGR for this business? Thank you.

Yes, yes, thanks. So we're still -- long term, we're still focused on a 15% CAGR. We're not seeing that now, stating the obvious, and we put up, what, 6% year-over-year growth in Machine-to-Machine. And as you indicated, other M2M peers who have reported have put up zero year-over-year growth. So I think that should underscore that we're doing well from a share standpoint. But the challenge for us and for our peers is Europe. If you take Europe out of the equation, we actually, from rest of world, put up greater than 15% year-over-year growth, so there are markets that are continuing to do well.

Europe, by the way, in the quarter did stabilize. In fact, it was up a tiny bit sequentially. So we're cautious on Europe, but right now our view is Europe has stabilized. It's down considerably year-over-year, but it's stabilized, and the way we're thinking about it now is that it's on the road to a slow recovery. And like I said, we did see the beginning of that in Q1. Q1 was up a tiny bit sequentially in Europe for us.

Okay, great. Thanks for taking my questions. Look forward to seeing you at CTI next week.

Same here. Thanks, Mike.

Your next question comes from the line of Peter Misek from Jeffries & Company. Your line is open.

Thanks so much. This is Jason North for Peter. Have you seen any impact in your M2M business from AT&T removing some of the bands it was using to serve 2G?

Well, I think it's quite well known that AT&T is, first of all, aggressive in the connected device market, which is good for everybody who competes in that space because I think they're a driver of demand, of overall demand, and secondly that they've been very focused on moving customers, both existing and new, from 2G technologies to 3G technologies. So we're right in the middle of that, Jason. We have already -- working with AT&T and our existing OEM customers, we've already migrated some of our existing 2G customers to new 3G products to align with the AT&T strategy.

So I think that is going well for us. I mean, one of the unique things about our position in the Machine-to-Machine market is that we've got 2G solutions, 3G solutions and 4G solutions. So the market requirement or air interface technology requirement is -- we've got it covered, and that's one of the reasons OEMs tend to select us. So we've been fortunate that those OEMs who have had to make the migration -- we've been fortunate to be able to have continuity with those customers and work with them through that migration.

Do you think you're also going to be able to get any kind of share gains because of that?

I think -- so I would say in general, I believe one of the key drivers of our strong share position and perhaps our share gains has been the breadth of our product line. Like I said, it's -- being able to service nearly every air interface requirement an OEM may have, or every geographical market an OEM may want to serve, puts us in a very strong position. And no doubt that makes us differentiated in the market and I think has helped our share position.

Okay. And I guess switching gears quickly, for the back half of the year in terms of drivers, what are you thinking about in terms of embedded notebooks versus the dongle mobile hot spot business in terms of relative strength in terms of growth drivers?

Well, we'll certainly stop short of commenting in detail on the second half, but I think in general, you're really talking about Mobile Computing when you mention those product names. And right now -- like I said earlier, right now we're pretty optimistic about the growth drivers we see in Mobile Computing. Now, having said that, as we all know, it can be a volatile business, so we're going to exercise some caution. We don't want to overheat expectations, but we're pretty optimistic. In AirCard [land,] a strong position with our current customers plus new customers plus strong product pipeline makes us feel pretty good. And with PC OEMs, we've seen a good trajectory, and we see some new opportunities as well with things like Win8 tablets. So I'll leave it that we're optimistic about our future prospects in Mobile Computing.

Great. Thank you very much.

Sure.

Your next question comes from the line of Ted Crawford from Roumell Asset Management. Your line is open.

Hi, Jason. This is Jim Roumell.

Hey, Jim. How are you?

Good. Great quarter and congratulations.

Thank you very much.

I just want to ask one question, because we've been watching Harmon, the leader in auto connectivity, seems to be absolutely on fire. And I have the announcement in front of me that you guys made last January of your relationship to collaborate with Harmon. And it just seems to me and I guess just wondering for some color of how much -- some kind of update on that Harmon relationship. They announced last week, I guess, some major new uptrends in China. Can you just give a little color on that relationship and how important will Harmon be going forward to really kind of move the auto vertical?

Sure, sure. Yes, we've got a -- as you've read and as you've acknowledged, we've got a really good relationship with Harmon. We view them as a key strategic partner in the connected infotainment world for automotive manufacturers. We have done early technology collaboration in 4G, as an example, and have done some interesting demos together. We do have design wins together that have yet to go to production, so we're certainly optimistic about where that will bring us both. So I view them as key.

Now, I'll also add, be careful not to draw a perfect alignment with Harmon's success to Sierra's success, because Harmon's exposure to the automotive business is much more diverse than ours is. For every infotainment system they successfully sell, as an example, it doesn't necessarily include a high-speed Internet connection. So they can drive excellent success, like you saw in China as an example, and that may not necessarily include content from Sierra Wireless, at least not right away. So I just would caution you there.

And I'd say, in the fullness of time, certainly they -- I believe that they view connected infotainment -- meaning high-speed wireless connections to the vehicle and to their infotainment systems -- as strategic. And certainly on that strategic element we are very well aligned and that's got us, I think, working quite effectively together.

Okay. Thank you, Jason.

You're welcome.

Your next question comes from the line of Kevin Manning from BMO Capital Markets. Your line is open.

Great. Thanks. Gentlemen, good afternoon.

Hello, Kevin.

A quick question on the -- kind of revisit the questions asked earlier on the Machine-to-Machine and AT&T. Can you give us some color on what your M2M module mix looks like between 2G and 3G?

On a global basis -- I'm assuming you mean on a global basis?

Yes.

It is today, Kevin, predominantly 2G. Now, that may seem counterintuitive, but certainly in the US market it is predominantly 3G and 4G. But in rest of world, it's predominantly 2G. So, I mean, if you add up our volume and did a percentage -- I'll go from memory here, but in 2011, total Company volume, including Mobile Computing and Machine-to-Machine together, was just under 10 million devices, and probably about 7 million of that was 2G. Now, we certainly see that over time -- we certainly see that mix over time changing to favor 3G and 4G technologies, but that will take time.

And so with AT&T specifically, are we seeing a pretty dramatic shift quarter-over-quarter, or is it more gradual?

No, I'd say it's a pretty aggressive shift for AT&T customers, yes.

And have you started seeing that this quarter for the first time?

No, we've seen it in previous quarters.

Okay.

So we've been -- yes, we've been working on migrating customers for, I would say, well over a year to -- from 2G platforms to 3G platforms.

But the actual shipments, has that been happening as well?

Yes.

Okay.

Shipments have commenced, yes.

Okay. And then on the Telstra business, is that pretty consistent and just fell below 10% because your overall revenue is up?

Yes, I'd say Telstra's always a -- is, every quarter, a very strong contributor. I'd say in Q1 it was -- they were off a little bit compared to previous quarters. Part of that was working through some inventory. Our view for going forward is that inventory levels have normalized and we've got new products launched there and they're going to step back up.

Great. And then one last question. On the PC OEMs, do you generally see them doing -- each OEM doing a big order for their specific laptop models and then replenishing as they have new launches, or do they continue to order throughout the year? Is this more of an intermittent order cycle?

For the most part -- for a moment, let's put these big enterprise deployments off to the side, because they can be lumpy and we did benefit from one of those in Q1. But for the most part what we see is consistent hub pulls. We generally have hub arrangements with the PC OEMs, and when they need product, they pull from the hub. And generally speaking, that is -- I would characterize it as quite consistent. And as new platforms get added, then that consistent trend kind of ticks up a little bit as they add new platforms to the mix. And now layered on top of that, we had the benefit of a big enterprise rollout in Japan. So that will happen from time to time as well, but I would say for the most part that that underlying trend is quite consistent.

Great. Thanks.

Sure.

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

Hey, good evening, guys. Nice quarter.

Thank you.

Thanks.

Question for you. When I think about Q2, it sure sounds like there's a lot of good things happening in the quarter, a number of new product launches and perhaps bulging enterprise orders out of Japan. Is that the right way to think about that? And with seasonality and the new programs getting launched in Q2, is it going to moderate into Q3 given -- assuming current economic conditions?

Well, I'll -- again, I'll be careful not to get too far ahead of ourselves here, Todd, on guidance for the second half. But maybe speaking to the growth drivers we see, in M2M our expectations continue to be steady growth. As I said earlier, we're not seeing the 15% year-over-year growth right now. We do expect to see that longer term. We believe that Europe is stabilized, and certainly we hope that stays the case. So M2M, we think steady growth as new programs launch and as new customers get to market.

In Mobile Computing, the growth drivers we're focused on our new LTE markets rolling out, so we're certainly hopeful that's a consistent theme. I think both Verizon and AT&T, as an example, announced that they're continuing to roll out new LTE markets. We certainly hope to be a beneficiary of that. Plus, new products in the pipeline, and that's usually good for demand, and a growing PC OEM business. So the growth drivers seem to be intact. Now, whether or not things moderate in the second half -- certainly, we're optimistic, but we're going to be careful not to get ahead of ourselves. But we are -- we certainly believe the growth drivers don't disappear in the second half is the way I'd put it.

Okay. And then just on LTE for a moment. So I guess the message is it was a little bit slow to get going, but now it's finally going.

Yes, I think that's fair. I think that's fair.

And is there any anecdotal observations you can make about sort of your standalone products versus apps on smartphones and how the carriers are thinking about that?

Sure. So using phone as a hot spot versus (multiple speakers)?

I mean, generically I know it's obviously a risk, but in LTE, are there sort of specific points beyond some of the things that you've talked about in the past that maybe get people to buy this versus going for an app?

Well, it's a great question, and you made the generic comment that it's a threat, and we still view it as a potential disruptive threat. Now, having said that, we also believe that the proliferation of WiFi connected devices in people's lives -- those are multiplying -- is a good support for a dedicated device and a dedicated device that will last you all day, meaning a device with a big battery and sophisticated software that enables you to last the day with all of your connected devices.

Now, your phone is not going to be designed necessarily that way. So I think proliferation of WiFi connected devices we believe is a good support case for a dedicated hot spot device, because the last thing you want to do is use your mobile phone as your hot spot and then pick it up to make a phone call in two hours and you've got no battery left. So I think that's a support point.

And we're also seeing some interesting developments in operators that could lend further support including family data plans, where you can spread your single data plan across multiple devices. We think that's interesting and supports demand for multiple connected devices in people's lives.

That's great. Thanks for the color. Appreciate it.

You bet.

(Operator Instructions). Your next question comes from the line of Gus Papageorgiou from Scotiabank. Your line is open.

Thanks. Congrats on a nice quarter. Just on the M2M business, on the AirVantage M2M cloud platform -- so that revenue, just under $3.4 million, growing faster than the overall M2M business, is that a recurring service revenue? And can you talk about the profitability of that business versus the roughly 32% gross margin of the M2M business in general?

Sure, sure. So a couple things. I want to be careful not to leave you with the impression that all of that $3.4 million is AirVantage services, because it's AirVantage and other. Actually, today, Gus, only a small portion of that is AirVantage cloud platform revenue, but it is growing. And the AirVantage cloud platform revenue today is a combination of recurring service revenue, so software-as-a-service revenue. There's a little bit of wireless service mixed in there too for a couple of select customers, but predominantly software-as-a-service revenue, so it's very high margin. And we're adding subscribers every quarter to the platform, so certainly our aim is to grow that over time.

I'll also point out that a key -- in our view, a key value driver of AirVantage in addition to, over time, building a big recurring revenue base, is we believe AirVantage adds value to our hardware. It makes us differentiated. It makes our devices differentiated because these things work as a system, right? Nespresso is a great example of that, a programmable device made by Sierra Wireless with application software on it, elegantly connected to the platform, which collects the machine data. It's kind of that end-to-end view that we believe makes us more important, creates more demand, not just for the platform, but for our hardware as well, and helps us protect margin on the hardware.

Okay. So is it fair to say that Nespresso and China are the two big customers in that right now?

Well, those are the two newest customers on that right now. They are in addition to customers like CBS Outdoor, Veolia Water Purification Systems and other applications, by the way, with Schneider, Peugeot as well. So there are a number of active customers using the platform today. Obviously, we need to add a lot more, but there's a number using the platform today.

Okay. And just finally, so how do you see that -- I mean, is that going to grow kind of in line with M2M, or do you see it faster or -- ?

It'll probably grow faster, but, Gus, it's going to be small for a while. Think of the recurring software-as-a-service revenue as small. And yes, it's probably going to grow a lot faster than 15% year over year, but it's small. So don't think of it as moving the needle anytime in the next 18 months, but it's still important strategically.

Okay, great. Thank you very much.

Sure.

There are no further questions at this time. I turn the call back over to the presenters.

Excellent. Thank you, Nick. Well, I want to thank everybody for joining the call. And as is usual, Management is available here for a follow-up call should you have additional questions.

Nick, that concludes the call from our perspective.

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