司亞樂 (SWIR) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Sierra Wireless, Incorporated Third Quarter Results Conference Call and Webcast.

At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time.

I would like to remind everyone that this call is being recorded today, Thursday, November 1, 2012 at five-thirty eastern time.

I would now like to introduce you to your host for today's call, Mr. Jason Cohenour, Sierra Wireless Chief Executive Officer, and Mr. Dave McLennan, Sierra Wireless Chief Financial Officer. Please go ahead, gentlemen.

Thanks, Jay, and good afternoon, everyone. It's Dave McLennan speaking. Thank you for joining today's conference call and webcast. With me today on the call is Jason Cohenour, the Company's President and CEO.

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

Before we get started, I will reference the Company's safe harbor statement. A summary of our safe harbor statement can be found on page two of the webcast and 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 the fourth quarter of 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 two 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, both of which can be found on SEDAR and EDGAR, as well as in 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.

I would now like to turn the call over to Jason for the business overview.

Thank you, Dave, and good afternoon, everyone.

Overall, I'm pleased to report that Q3 was a very solid quarter for Sierra Wireless. Our revenue grew by nearly 11% on a year-over-year basis to $162.6 million, and profitability was significantly above expectations.

Non-GAAP earnings from operations were $8.3 million, and non-GAAP EPS was $0.28, well above our guidance range of $0.14 to $0.19 a share.

Underpinning our results was exceptional performance in our M2M business. Q3 M2M revenue was $86.1 million, representing another record quarter.

We continue to experience good growth in the Americas and Asia, while Europe remained stable but lower than historical levels due to unfavorable macroeconomic conditions in the regions.

We also completed our acquisition of Sagemcom M2M on August 1, further bolstering our leadership position and adding $4.6 million of revenue to our consolidated results.

Our mobile computing business provided a solid contribution in the quarter, as well. Revenue was up 7% on a year-over-year basis to $76.5 million, driven by solid 4G AirCard sales and continued strong growth in PC OEM.

Before discussing the business lines in more detail, I'll take a moment to revisit our overall strategy -- to be a global leader in wireless solutions for both machine-to-machine and mobile computing, two important growth opportunities in the wireless industry.

In M2M, we're the clear global leader. We're focused on building on our leadership position organically and through acquisitions, such as Sagemcom, while also investing to expand our role in the M2M value chain.

Longer term, our goal is to continue expanding our offering across the M2M value chain and to become the M2M platform of choice for OEMs, integrators, and operators around the world, providing intelligent hardware, cloud services, and powerful tools to make it easier, faster, and less costly to build and deploy M2M applications.

In Mobile Computing, we're focused on growing with our key operator and PC OEM customers and on being their go-to technology partner, providing the best, most reliable products that support the latest air interface protocols and operating systems. This role places us on the leading edge of new 4G technologies and other important ecosystem innovations, such as Windows 8 and Ultrabooks.

We're also focused on maximizing leverage across the business lines, taking advantage of common leading-edge technology platforms, our broad global footprint, and combined supply chain scale, and this leverage really works.

For example, we've leveraged our 4G success in mobile computing to create market-leading 4G module and gateway products for M2M, as well. This 4G platform leverage has helped us to earn important M2M wins in networking, automotive, and public safety, and we believe this leverage makes us unique in the market and provides important competitive advantages for both business lines.

Looking at machine-to-machine in more detail, in the third quarter, we delivered another record quarter in our core M2M business. We experienced broad-based demand across the business with exceptionally strong results in some key M2M segments, including networking, where we and our customers are benefiting from a growing trend with network operators to use LTE for fixed line replacement; in automotive as key customers started to ramp production of new connected car solutions for the US and European markets; in field service, where our industrial handheld customers participated in large enterprise rollouts; and in payment, where the addition of Sagemcom increases considerably our share position with payment terminal OEMs.

We also continued our investments in innovation and announced a number of new products and partnerships to drive our M2M business forward.

At CTIA MobileCON in October, we announced the next generation AirVantage M2M cloud, as well as a new partnership with Amazon Web Services. The AirVantage M2M cloud provides a secure, scalable, simple platform that enables our customers to rapidly build and deploy their M2M applications. Combined with Amazon Web Services, the AirVantage cloud enables customers large and small to deploy an application with lower implementation costs and nearly zero capital investment.

This launch of the next generation AirVantage Cloud is an important step in Sierra Wireless becoming the M2M platform of choice for OEMs, integrators, and operators around the world.

At the Paris Auto Show, we announced, in partnership with Bouygues Telecom, a new innovative 3G USB key for Peugeot's Citroen that powers the new Peugeot Connect Apps system. The Connect Apps device is specifically designed for automotive use and plugs into the vehicle, providing the driver with real-time information on traffic conditions, weather, and navigation, as well as information about services nearby.

Additionally, we introduced the AirPrime SL9090, a new multi-mode product in the AirPrime SL Series of LGA industrial-grade embedded wireless modules. The multi-mode module gives device manufacturers the ability to operate on networks that use either HSPA-plus or EV-DO technologies with a single product design.

And while driving growth and product innovation, we also executed on key strategic and operational initiatives in our M2M business. As mentioned earlier, we closed the Sagemcom M2M acquisition on October 1 -- pardon me, on August 1 and had been driving a rapid integration.

To date, the transition has been seamless, and we are already well on our way to operating as one company, including fully integrated sales and marketing efforts, a common product portfolio and roadmap, combined supply chain, and a complete systems and IT transition for the new Sagemcom team members. We're also very close to completing significant facility transitions and consolidation in France, North America, and China, which we believe will drive even stronger execution and improved cost efficiencies.

I'm also pleased to report that our organic M2M business was profitable in Q3 on a fully allocated cost basis. We expect M2M profitability to be further enhanced with the addition of Sagemcom and continued growth.

To summarize, I'm very pleased with the performance of the M2M business in the third quarter and excited by our continued success in product innovation, customer design wins, and operational improvements.

Looking forward to Q4, we expect strong year-over-year growth in M2M, driven by continued strength in our AirPrime and AirLink sales and a full quarter of contribution from the acquired Sagemcom M2M business.

Now, before turning to Mobile Computing, I will add that, true to our strategy, we are indeed building the clear global leader in M2M and have further third party validation of this.

According to ABI Research, our M2M market share, with the addition of the Sagemcom M2M business, was over 34% in 2011, significantly higher than any other player.

In addition, in its most recent assessment of the competitive position of M2M players, ABI Research ranked Sierra Wireless number one by a considerable margin in its competitive vendor matrix. We achieved the highest industry scores on both innovation and on implementation.

So according to ABI, we're the clear global leader in M2M and the best-positioned player to continue to lead the industry. I believe this puts us in a great position to seize the M2M opportunity and to drive sustained revenue growth and profitability growth well into the future.

Taking a closer look at our Mobile Computing line of business, coming off an exceptional Q2, our Mobile Computing results in Q3 were solid.

On a year-over-year basis, AirCard revenue was up slightly, while our sales to PC OEMs were up an impressive 44%.

In AirCards, we continue to enjoy a strong product and share position at our key operator customers, including AT&T, Sprint, and Telstra.

We've also successfully leveraged our leading-edge 4G products to build solid positions in new channels, such as Virgin Mobile and Rogers Communications.

In addition, our AirCard products continue to get positive reviews, including PC Magazine's "Editor's Choice" awards for our latest mobile hotspots. Our AirCard product pipeline is also strong, and we've secured successor channel positions for our next-generation products, which we expect to launch in the first half of 2013.

Despite our product and channel share success, AirCard revenue was slightly weaker than expected in Q3 as LTE rollouts and related promotion of the mobile broadband category is taking time to develop.

In PC OEM, our strong growth continued during the quarter. We also believe that our share position continues to strengthen, driven by our leading-edge 4G module products and a significant technology lead in adding Windows 8 support to our products.

The strength of our technology lead was made evident recently when two of our customers, Samsung and Lenovo, launched the first-ever LTE-enabled Windows 8 tablet PCs, leveraging our ultra-thin LTE modules and Win 8 software expertise. We've secured additional LTE and Win 8 design wins and continue to see both as important drivers in this category.

Notwithstanding our solid progress in mobile computing, we expect Q4 mobile computing sales to decline sequentially, driven by expected product transitions with operator and Win 8 OEM customers, as well as an expected competitive entry in one of our channels.

Looking forward, however, we remain optimistic about the continued growth prospects in mobile computing based on the strength of our channel position, our robust 4G product portfolio and pipeline, our technology leadership, and expanding LTE network deployments.

With that, I'll turn the presentation over to Dave, who will take us through a more detailed look at third quarter results and guidance for the fourth quarter.

Thanks, Jason.

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

As Jason indicated earlier, Q3 was a solid quarter for us. Starting with our GAAP results, we had earnings from operations of $1.1 million, up from a loss of $1.8 million a year ago, and GAAP net earnings of $3.7 million, or $0.12 per share. That compares to a loss of $1 million, or a negative $0.03 a share, a year ago.

Our Q3 2012 net earnings were helped by an FX gain and a net income tax recovery, but even without these, we were solidly profitable on a GAAP basis in the quarter.

During the quarter, we closed the SAGEM M2M acquisition on August 1. The acquired business contributed revenue of $4.6 million for that period and broke even during the two-month period in which we owned the business. The guidance we provided for Q3 excluded the impact of the SAGEM M2M business, and I'm pleased to report that our actual non-GAAP results, excluding Sagemcom, met or exceeded all of the guidance metrics.

Revenue of $158 million, excluding Sagemcom, was in line with our guidance range of 157 to $162 million. Earnings from operations of $8.3 million was above the 6 to $8 million guidance range, and net earnings of $8.8 million, or $0.28 per share, was well above our guidance range of 4.3 to $5.7 million, or $0.14 to $0.19 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, impairment, acquisition costs, integration costs, restructuring costs, foreign exchange gains or losses on foreign currency contracts, as well as translation of balance sheet accounts and certain tax adjustments.

Looking at revenue growth and line of business mix for the third quarter of 2012, revenue grew by 11% on a year-over-year basis to $162.6 million in the quarter. Excluding the $4.6 million contribution from Sagemcom, which wasn't in the comparable quarter a year ago, revenue was up 7.6% year over year on a comparable basis.

Machine-to-machine contributed $86.1 million of revenue, representing 53% of total sales, and is up 14% year over year. Excluding the $4.6 million contribution from Sagemcom, M2M was up 8.2% year over year, driven by exceptionally strong results in key segments, such as networking, automotive, field service, and payment.

Sequentially, relative to Q2, M2M growth was also very strong at 10.8%, or 5.2%, excluding the contribution from Sagemcom.

Our Mobile Computing results in Q3 were solid, although down sequentially as expected compared to the exceptional results we had in Q2. In total, our Mobile Computing business was up 7% in Q3 on a year-over-year basis and represented 47% of sales.

On a year-over-year basis, AirCard revenue was up slightly, while our sales to PC OEMs were up 44%.

In the third quarter, we had one greater-than-10% customer, which was Sprint, at 14%. In total, our top three customers contributed 32% of Q3 revenue, and that compares to 39% in Q2.

We continue to make good progress in improving our profitability. Non-GAAP gross margin as a percentage of revenue was 29.5% in the third quarter comparable to the level we experienced a year ago, and as expected, down sequentially from Q2, mainly as a result of the exceptionally favorable product mix we experienced in Q2 and the impact of planned price reductions in Q3 on some of our AirCard products.

On a segmented basis, M2M gross margin was 32.5% and Mobile Computing gross margin was 25.9%. Gross margin for the acquired Sagemcom M2M business was 35%.

Non-GAAP operating expenses were lower than expected at $39.6 million and included approximately $1.6 million of OpEx for the partial quarter we owned Sagemcom.

The lower-than-expected level of OpEx in Q3 is primarily due to a shift in the timing of some new product development expenses into Q4 and continued cost control.

Solid revenue and gross margin performance, combined with lower-than-expected OpEx, drove better-than-expected profitability.

Q3 non-GAAP earnings from operations were $8.3 million compared to $4 million in the comparable quarter a year ago.

During the quarter, the acquired Sagemcom M2M business broke even at the operating level, and overall, our M2M business was profitable.

Q3 non-GAAP EPS was $0.28 per share, compared to $0.15 a year earlier.

Turning to the balance sheet, our financial capacity remained strong. During the quarter, we used $65.8 million of cash. This includes $55.2 million to fund the purchase of the SAGEM M2M business, $3.9 million of capital expenditures, and negative cash flow from operations of $3.6 million, primarily driven by an increase in AirCard-related inventory. Commencing in Q4, we expect to begin monetizing this increased inventory.

Our cash balance at the end of Q3 was $59.5 million.

Subsequent to the completion of the quarter, we entered into a new $50 million revolving line of credit. This facility replaces our existing $10 million line of credit and is designed to augment our working capital capacity. There are currently no borrowings under the facility.

Moving on to guidance, guidance is on a non-GAAP basis. In the fourth quarter of 2012, on a sequential basis, we expect revenue to be flat compared to the third quarter as a result of continued strength in our M2M business, including a full quarter of contribution from the acquired SAGEM M2M business, offset by lower sales in Mobile Computing.

We expect gross margin to be slightly higher, driven largely by a favorable shift in product mix, and operating expenses to be modestly higher as a result of the timing of new product certification and launch expenses, as well as a full quarter of SAGEM M2M expenses.

Q4 is the first full quarter of the Sagemcom M2M business. In Q4, we expect the SAGEM M2M business to contribute approximately $13 million of revenue and about $2 million of earnings from operations.

Based on these assumptions, on a consolidated basis, in the fourth quarter of 2012, we expect revenue to be between 160 and $165 million. We expect earnings from operations to be between 7.5 and $9 million, and net earnings to be between 5.6 and $6.8 million, or $0.18 to $0.22 per share. Incorporated in this guidance is an effective tax rate estimate of 22%.

I'll now turn the call back to Jason to sum up.

Thanks, Dave.

To summarize, we're very pleased with our solid Q3 profitability, driven by revenue growth and good cost control.

Our M2M business delivered exceptional results across a number of key segments and regions despite the continued macro challenges in Europe.

The integration of Sagemcom is on track, and the acquired business is now contributing in a significant way. We expect Sagemcom to be accretive to our Q4 earnings and to bolster our position in key markets.

We continue to make operational refinements in manufacturing, R&D, sales, and facility consolidation, which we believe will enhance our efficiency and execution.

Our investments in M2M are paying off. We're the clear global leader in a market with excellent long-term growth prospects, and we're making steady progress in expanding our position in the M2M value chain. Our M2M business is profitable, and we believe that we are well positioned to continue to drive profitable long-term growth.

Coming off an outstanding Q2, our Mobile Computing business provided a solid, profitable contribution to our Q3 results. We continued our strong growth, [and] PC OEMs and our powerful AirCard product line have kept us well positioned with key operators.

We've won channel slots for our next-generation AirCard products, and we've taken a clear leadership position in providing Win 8-enabled LTE-embedded modules for tablets and Ultrabooks.

As we look forward, we remain optimistic that the strength of our 4G position and technology leadership with PC OEMs, combined with further LTE deployment and ramp-up of new Win 8 platforms, will lead to solid growth opportunities in Mobile Computing.

In Q4, we expect our results to be in line with Q3. We expect a strong contribution from Sagemcom to be offset by normalizing sales levels in our organic M2M business and some softness in Mobile Computing as we work through product transitions with some key operator and PC OEM customers.

Notwithstanding our temperate view of Q4, we continue to be enthusiastic about the profitable growth opportunities that lie ahead. We'll remain focused on capturing these opportunities and on continuing to drive solid year-over-year growth and improving operational results with the goal of creating long-term sustainable shareholder value.

Jay, this concludes our prepared remarks. You can now open the line up for questions.

(Operator instructions)

Richard Tse, Cormark Securities.

So just a couple questions on the M2M side. Last quarter, you sort of gave a split by geography -- Americas, Asia Pac and Europe. Do you have that sort of number on a year-to-year growth basis this quarter?

Sure, Richard. It's Dave here. So this is our M2M business, so not our full business.

Right.

So we -- sorry, just get to the right page here -- so we were about $21 million in the Americas, 21.1 in EMEA, and 44.2 in Asia Pac.

And EMEA included some Sagemcom contribution.

And a little bit -- and Asia Pac, as well. That's right.

Right. I'm just trying to get a feel for -- EMEA, was that sort of down year over year, or is it -- I'm trying to get a feel for how M2M is growing in sort of the key growth markets outside EMEA.

Yes, it's pretty --

Stable is the way to think about it, Richard.

Okay.

Ex Sagemcom, Europe was stable.

Okay. And so with the contribution of Sagemcom this quarter, you're talking about a normalized M2M business. So I guess to kind of look at it from a different perspective in that that's sort of a growing piece of the company, can you give us maybe some color on the pipeline then as we look 12 months out as to how that would look and how that's sort of building?

Well, we're bullish on it. I think -- so talking about the organic business, we expect, as an example, our AirLink and AirVantage products to experience solid growth. We also expect, I would say, measured -- continued measured growth out of our organic M2M embedded modules business, driven by the typical markets that we've been getting a lift from, which are automotive, networking, and energy. And then layering on Sagemcom, we expect to get a pretty nice boost in the payments segments, as well a good business platform in different regions, including Brazil, that we can leverage longer term in segments, such as automotive. So 12 months, I mean we continue to be very bullish on M2M overall.

Okay. And then just switching gears on the Mobile Computing side, you quickly sort of went the [decline] due to transition with customers in that competitive entry in one of the channels. Can you elaborate that on a little bit?

Yes, so without picking names, one operator where we've got, I would call, extraordinarily high channel share, we do expect to be sharing that channel in the coming months. We still expect to maintain a strong leadership position, but we're going to have to make room for another player.

In that same channel, we plan to launch next-generation AirCard products early in 2013, so we're getting, I would say, some softness as a result of those two factors in that single channel.

And then with respect to PC OEMs, we've got -- a lot of our OEM customers are very focused on Windows 8 support now that Windows 8 is out and launched, and we're working through Windows 8 support across our embedded module product line-up.

So even though we've launched with some customers on Win 8, Win 8 is not yet available across all of our products, so some of our PC OEM customers are taking pause here and waiting to resume -- I would say resume buying at their normalized levels until Win 8 support is provided, and we expect that to be provided on some of our legacy modules later this year but probably too late to have a meaningful impact in Q4.

Okay, and just one last question for David. In the $0.28 adjusted EPS number, I'm looking at your reconciliation from GAAP to non-GAAP. It's not clear to me whether the income tax adjustment noted on that schedule includes the full impact of that sort of one-off that you're talking about. So does it or doesn't?

No, taxes are very complex, Richard, so --

How much of that impact is in $0.28, I guess is my question.

Right. In our non-GAAP adjustments, we stripped out about $1.1 million of the recovery, so think of it this way. We had a $1.5 million recovery in the GAAP results, and our non-GAAP results adjust out about 1.1 of that to get us -- well, about 1 million to give us a $0.5 million recovery. And there's a bunch of moving pieces there. So we've stripped out what I'll call the non-recurring things and left in the things that were legitimately affecting the quarter.

Okay, thank you.

I will say that our target tax rate for Q4 is 22%, if that helps.

Okay, thanks.

Mike Walkley, Canaccord Genuity.

This is Matt Ramsay on for Mike today.

I guess, first of all, congratulations very much on the first M2M profitable quarter. I know that was a major milestone for the business, and congrats on closing the Sagemcom deal.

I guess a couple questions on M2M, and first is on Sagemcom. With the results that you just printed and the guidance that Dave gave for $13 million in Sagemcom revenue in Q4, it now looks like Sagemcom's overall sales are going to be down on a year-over-year basis from what you guys reported at the acquisition, and it sounded like from some commentary you gave around the time of the acquisition that the sales for that business were actually up year over year in the first half of the year.

So could you talk about maybe some trends in that business and things that might have changed from the first half through the second half of the year?

Yes, I think -- this is Jason, Matt -- I would characterize Sagemcom in Q4 as aligned with our expectations if it's -- if the $13 million guidance is viewed as down year over year, I actually don't -- I don't actually reach that conclusion. If it is down, it's very close. So I view that as in line with expectations. Last year, full year, I believe revenue was about 50 million --

That's right.

-- from Sagemcom, and I know it was a little lighter than that in the first half of '12, but 13 million is certainly, I would say, aligned with a reasonable run rate.

So with respect to what we expect out of that business, I think right now our view is delivering roughly in line with expectations on both the top and bottom line. Hasn't been inside for very long, but that's our view right now.

Thanks. That's helpful. And, Jason, you talked about in the past kind of this overall market growth rate for M2M on kind of a 15% level in there on a revenue CAGR going forward. If you include your Sagemcom acquisition, do you think that that number is attainable for 2013, or are we still going to be running a slight bit under that due to maybe some softness in Europe?

Yes, I think -- so I'm inclined to say that 2013, we're still going to continue to struggle through a tough macro situation in Europe, so I think if you take the run rate -- if you take the Q4 M2M run rate business, our expectation is that we will not hit 15% year-over-year growth in 2013. I think it will be a bit more measured than that as we grind through the challenges in Europe.

And I guess, Dave, a couple questions for you. I guess, first of all, you did give a number around the operating expenses for Sagemcom in the quarter, but looking forward, could you give your thoughts around kind of a steady-state OpEx level that we could expect because, obviously, you guys have benefited from a ton of leverage in the last couple of quarters, and I know that you had targeted kind of a $40 million non-GAAP operating expense run rate in the past. What should we look for kind of on a run rate basis going forward?

Yes, I think the SAGEM business, as Jason said, we've done a lot of integration already in the early period, so it's going to really be fully integrated into the M2M embedded business, so it will be hard to identify specifically going forward OpEx there.

But you're absolutely right, Matt. We're targeting -- have targeted for quite some time $40 million of OpEx, and I expect that we'll be a little bit above that but not demonstratively above that because of the addition of SAGEM.

All right. Well, thank you very much for taking my questions, and again, congratulations on the solid quarter.

Thanks, Matt.

Thanks, Matt.

Paul Treiber, RBC Capital Markets.

I just wanted to jump back to Sagemcom on the revenue and the seasonality of it. You mentioned last year the first half was slightly weaker. Is that normal seasonality for the business in that the first -- it's weighted towards the back half of the year?

Yes, there is a little bit of back-end loading, but --

Yes, I don't think it would be overly dramatic, but it's probably a little bit heavier generally in the back half, Paul.

Okay, thanks. And then --

A lot depends on what happens with GSMR, the GSMR part of that business, which is a small -- not a large part of the business, but that is -- that can be a little bit lumpy because it's project driven, so quarter by quarter, that can have a bit of an impact and make it look a little lumpy.

Okay. And then moving to M2M gross margins, they've declined about 100 basis points quarter over quarter even with the inclusion of Sagemcom. When you look at the gross margins, is there anything driving that decline, or is it just mix between various OEMs and verticals? Or is there a change in the overall profitability of the M2M business?

I don't think so. I think as you look at the overall M2M business, certainly from when we acquired Wavecom, as an example, the gross margin profile has changed and it's come down, but I think we've been pretty stable here on the low to mid-30s.

So on the more recent quarters, I would characterize that as mix driven predominantly, and in Q4, as an example, we expect M2M gross margin to drift up a bit from where it was in Q3 based on a favorable mix shift.

So certainly our expectations are that we need to run that business just about in the mid-30s is our expectation. Of course, there are price pressures in the marketplace and it's incumbent on us to protect price and drive costs down, but we're modeling the business around the mid-30s range.

And Q2, Paul, was a bit unusual, and some mix things drove that up. If you go back to Q1, Q1 was 32.1%, so we're a little bit above that again in Q3.

Okay, and then also on -- diving more in the M2M results by vertical, are there verticals that are more resilient to some of the macroeconomic headwinds? And then, obviously, there are ones that are weaker. Could you just provide more detail on which ones are seeing strength and which ones are more -- and which ones are weaker?

Well, we've been pretty consistent that what's driving our machine-to-machine business are predominantly -- and these are not necessarily immune to macro headwinds, but automotive, networking, and energy have been the real segment drivers in our business, and I would quickly add as number four and five payment, because Sagemcom brings a big position in the payment industry, and transportation.

So with those five markets, you're well over 50% of our machine-to-machine business, none of which, by the way, are immune to macroeconomic headwinds. So I think what you're seeing, frankly, in our business is some macro pressure, but which is tempering what would otherwise be stronger market growth in all of those segments.

Growth drivers in automotive, as an example, are increased penetration in connected car applications. So it's very -- penetrated at a very low level today, and notwithstanding guys like Renault and Peugeot are selling fewer cars, we believe that penetration rate goes up, right? So those two forces kind of fight against each other. But that's what you're seeing. Those five markets are the key drivers right now, and we're experiencing market growth, growing penetration, tempered by macro headwinds in Europe.

Another thing at play here, Paul, is that we've got an interesting geographic mix, so while we're facing macro headwinds in Europe, other regions are performing very well, like the Americas and Asia Pac that are more than offsetting the pain we're showing in Europe.

Okay, and then lastly, on the taxes, you provided a target tax rate for Q4. Could you provide a similar number for Q3 so we can have something as a comparison?

Yes, I think we stripped out the nonrecurring items in Q3 to get to the $0.28, but the 22% that we are targeting on Q4 really represents what we think the full-year tax rate is going to be. So that's, I think, representative when you look at the year in total what the full year tax rate will be.

Okay, thanks a lot.

Peter Misek, Jefferies.

Just a couple of questions. Firstly, can you help us remember the strategy for creating a motor on the M2M business? Remember your describing some of the key APIs, operating system platform type, and can you walk us through how you think you can extend that to sort of maintain your M2M leadership? And then I have a follow-up.

Well, in general, you heard me describe the expansion in the value chain, and I know that's a pretty abstract term, but over and above making modules, meaning taking base band and RF components and making a radio, we're very focused on providing embedded intelligence at the edge, which requires a lot of embedded software innovation in the form of real-time operating systems.

In our 2G product line, we even develop our own protocol stack and applications that run on these platforms, and in fact, many of our modules are used as not only the wireless connection but also the application processor.

So we are continuing to innovate in that area, which we believe not only differentiates us but enables us -- enables our customers to lower their overall system cost because they can actually get rid of some components. So that's one key. That's the intelligence at the edge, if you will.

And then going the other way, we are very busy building a powerful platform in AirVantage, so AirVantage provides a very robust packaged device management, subscription management, and provides very powerful tools so customers can rapidly build and deploy their applications.

So two things there. I think providing this, what we call the M2M platform, is not just about the AirVantage cloud; it's also about the intelligence at the edge. Puts us in a different position relative to our peers, and it also enables us to capture more of the value chain and get paid for that.

So just to take this a little bit further, so you feel that your market share position in M2M is not only defensible, but by adding these [modes], you feel like you can continue to capitalize on this growth? Is that correct?

Yes.

So if we look at the market size opportuity, what are you expecting for the market to grow M2M on whatever forecast you're willing to give -- next quarter, next year, whatever? And, again, I want to follow up a little bit.

You know what? What I'll say to that, Peter, is it's been, obviously, a challenging macro environment for the past year plus. In 2012, I think we probably grew -- our M2M business probably grew a little faster than the market, so put a market growth rate of 6% or 7% probably. And as we look forward to 2013, we certainly hope it improves and back to a -- what I would consider kind of a long-term target of 15%, but that's not what we're putting in our 2013 business plan, if that helps you.

Our expectation is we're going to continue to feel some headwinds, particularly in Europe, and that market growth, in general, is going to be tempered by that.

So I think if you continue the run rate we've experienced in 2012 into 2013, that's probably roughly aligned with our expectations on market growth.

So as we think about the market and the opportunity for M2M, is there anything you feel, aside from macro, that's holding you back from achieving the higher end of those growth rates? I'm just trying to gauge for how we should think about numbers going forward because that clearly seems to be the one business of the two that you have a clear -- absolutely clear lead and some defendable market positions and just trying to capture what that opportunity and that value is. Thanks.

Yes, and I would leave it at that. I do think that's the only -- I mean there's always competitive forces, but in our view, the key resistance right now to achieving 15%, 20%, 25% market growth is macroeconomic pressure in key regions, so I think the good news is we've done a tremendous amount as a company over the things we have control over to, I think, create a very different -- not only the leading position but a very differentiated position. So when the macro headwinds dissipate, I think we stand to be a direct beneficiary and to enjoy at least market growth rates, if not beyond.

Great. Thank you.

Sure.

(Operator instructions)

Todd Coupland, CIBC.

Dave, I have two questions. I wanted to clarify the tax point, if I could. So, roughly $0.06 would be a 22% tax rate on the $0.28, and then I didn't quite understand the 1.5 to the 1.1. So were you saying you included about 500K of nonrecurring? So should we take another penny or so out to get to a cleaned-up number?

Well, the way we presented the non-GAAP number, I think, is a -- call it a cleaned-up number. If you want to go -- and just to take you through that, the 1.5 million recovery in the non-GAAP basis, when we make non-GAAP adjustments for, call them, unusual non-recurring things, that results in a $0.5 million recovery on a non-GAAP basis, and that translates into $0.28.

So I think that's a fair presentation of the non-GAAP earnings in the quarter. You can go further than that if you want and adjust the expected decrease in our tax rate. Earlier in the year, we were expecting 27%, 28%, and we're now expecting 22%. So that adjustment has happened in the quarter, as well, but over the full year, that will work itself out.

I do think, Todd, that the $0.28 is representative.

Okay, sorry, just to be clear, is there 22% of taxes in the $0.28?

No, there's other -- there is on some items, but then there are other nonrecurring recoveries that offset that.

What tax rate is the $0.28?

So what tax rate is in the -- in where we're profitable? The 22%.

Okay.

And then there are some other adjustments that decrease our effective tax rate.

So what would have been the effective tax rate in the quarter?

You know, we have legitimate recoveries on a non-GAAP basis, so that $0.5 million recovery, I think, is representative of taxes, so that's a --

Okay, so that's the $0.05 recovery. Okay, so then it's essentially untaxed number then plus the $0.5 million?

Correct.

Okay, that's fine.

And, Todd, if it will help, I refer you to the GAAP/non-GAAP reconciliation that's on the website.

Yes, I see it here. I just wasn't completely clear on it, so apologies if it was a little (inaudible).

Yes, it's -- taxes are very complex. That's for sure.

We're simple investors. Okay, so my question had to do with the mobile computing business. I just want to make sure I'm doing my math right. So if I add Sagemcom to run rate M2M so Q4 M2M will be at least 100 million roughly and maybe hit some growth into Q4, as well, but plus or minus 100 million.

So that would put mobile computing at 62 million at the midpoint of your range, which, when I look back, that's probably the lowest number in a few years in mobile computing. So is this sort of the structurally lower number, or is it the inventory clean-out that you spoke about? Like how should we be thinking about this number as a base going forward?

Yes, I think (inaudible) -- it looks like Dave wants to make a comment, as well, but your math on the M2M number is not correct.

Okay.

It's lower than that in our guidance, and we're not going to provide guidance on a business line, but it's lower than that. So while mobile computing is down sequentially for sure, it's not down as low as your math implies in our guidance.

Okay, so you're saying the 86 is going to go down some, and then add the 13 on top of that, basically?

That's right. That's right, yes.

But you don't want to say how much the 86 is going to go down by?

That's right. And the way to think about that is -- so what's happening at M2M is, of course, we're adding the Sagemcom for a full quarter, but Q3 in our M2M embedded business was exceptionally strong, and we had the benefit of what I would call a couple of unusual items in networking and field service that aren't going to recur every quarter. So we'll come down a little bit in embedded, and that will be partially offset by growth in our AirLink and AirVantage product lines but not fully offset.

Okay. Okay, fair enough. But directionally, the mobile computing question, I guess, is still out there. Okay, maybe it's not 62, but it sure feels like it's into the 60s anyway even with your --

I don't think so.

No?

I don't think so, no, no.

Okay.

And I'll leave it that. Doesn't have a six handle. I'll leave it there, but -- and, yes, it's definitely changed. It's definitely changed from Q2, which was extraordinary.

So what's a normalized run rate there? I mean, candidly, it's tough to tell because it is a volatile business, but even at 70 million a quarter, it's profitable, it's contributing in a meaningful way, and we'd like to see it higher. We'd like to see it in the high 70s, low 80s on a run rate basis, but that's not what we've got inked into guidance.

Okay. And the oxygen in terms of marketing dollars for iPhone 5 and Galaxy -- various versions of the Galaxy, etcetera, is that proving to be -- is that getting in the way of a little bit more promotion of these products, as well as the telcos make choices on what they want to promote?

Yes, I think that is a factor for sure. I'd put two factors on it. I would put certainly that. There's 100 pennies, 100 promotional pennies for operators to spend, and well, they're all going on iPhone and other smart phones at this point in time, or most of them are, and the other is LTE deployment. We need to see more LTE deployment by our key customers, remembering that we don't have exposure to Verizon, who's got quite -- they've got critical mass coverage.

Our customers are catching up, and by the way, promotional dollars and LTE deployment are related, and as new LTE markets are deployed and as operator confidence around their LTE service grows, that's going to naturally, we believe, fund more promotional efforts, but it's going to take time to get to deployment, and deployment after deployment follows promotional dollars.

That makes sense. Okay, thank you very much. I appreciate the extra color. Thank you.

You bet.

Thanks, Todd.

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

Great. Thank you very much, Jay, and thank you, everybody, for participating in today's Q3 results conference call. This ends today's conference call, and management will be available here in Vancouver for additional follow-up questions should you have any. And, Operator, we are ready to disengage the line.

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