司亞樂 (SWIR) 2012 Q4 法說會逐字稿

Good afternoon and welcome to the Sierra Wireless 2012 fourth-quarter and year-end 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. Instructions will be provided at that time. I would now like to remind everyone that this call is being recorded today, Wednesday, February 6, 2013 at 5.30 Eastern time.

I would now like to turn the meeting over to Mr. Jason Cohenour, Sierra Wireless Chief Executive Officer; and Mr. Dave McLennan, Sierra Wireless Chief Financial Officer. Please go ahead, Mr. McLennan.

Thank you and good afternoon, everyone. 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 the fourth quarter 2012 financial performance in detail as well as guidance for the first quarter of 2013. 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 the safe harbor statement can be found on page 2 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 for the first quarter of 2013 and commentary regarding the outlook for our continuing business. 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 AGAR as well as in our other regulatory filings. This presentation webcast should also be viewed in conjunction with our press release and with the supplementary information on our website.

With that I'll turn it over to Jason.

Thank you, Dave, and good afternoon, everyone.

As you are aware, last week we announced another major step in the continuing transformation of Sierra Wireless -- the completion of a definitive agreement to sell our AirCard assets and operations to NETGEAR. This deal represents a major milestone for our Company and brings us another step closer to becoming the pure play leader at M2M and connected device solutions. We anticipate net proceeds from the sale of approximately $100 million, which we will use primarily to accelerate growth and create shareholder value through additional M2M acquisitions. The execution of this agreement also impacts the manner in which we are reporting our results.

In accordance with US GAAP, we have recorded the assets and liabilities associated with the sale as held for sale, and the results of the AirCard business as discontinued operations. Revenue from our AirCard discontinued operations was $54 million in the fourth quarter of 2012 and $247 million for the full year 2012. More detail on the financial performance of our discontinued operations can be found in today's press release.

The primary focus of today's call is our Continuing Operations, which consists of our AirPrime embedded modules for PC OEMs and machine to machine, our AirLink M2M gateways and routers, and our AirVantage M2M cloud. As a reminder, the quote, new CO wireless, or our Continuing Operations, will be the pure play leader in M2M and connected device solutions with over 34% market share.

Our base of customers and partners is extensive and enviable, with many of the world's leading OEMs spread across many industry segments and even more applications. We are a leading innovator with a broad leading-edge product portfolio and unique device-to-cloud offerings. Our continuing business has significant scale, shipping on a pace of over 11 million units per year and generating more than $400 million in annualized revenue. We have global capability with sales and support around the world and R&D on three continents. In short, we have all the elements required to drive profitable organic growth and industry leadership. Following the transaction, we expect to have over $160 million in cash and no debt, providing us with the resources we need to accelerate our growth and value creation through acquisitions.

Another key reason why we believe we will continue to expand our position and drive profitable growth, is the breadth and depth of our M2M product offering. We have the industry's broadest embedded module product portfolio, ranging from 2G to leading-edge 4G, covering multiple form factors and delivering a range of embedded intelligence options. This enables us to meet the needs of nearly any global OEM operating in any region on any network around the world. We have a range of intelligent gateways and routers that delivery a highly configurable plug-and-play solution, and we have our AirVantage cloud that works with our hardware platforms to enable the rapid development and deployment of M2M solutions. By providing device-to-cloud solutions, we make it easier, faster, and cheaper for our customers to build, deploy, and manage their M2M solutions. We believe that this places us in a unique competitive position and enables Sierra Wireless to not only expand our share but to capture more of the value chain, expand margins, and to build competitive barriers.

Our go-forward business has delivered excellent growth and improving profitability over the past four years through a combination of organic and inorganic growth, improved gross margins, and operating expense management. Since 2008, our go-forward business has grown at a rate of 27% per year to nearly $400 million in 2012. Year-over-year revenue in 2012 was a very solid -- revenue growth, pardon me, in 2012 was a very solid 19% compared to 2011. Revenue in Q4 of 2012 was exceptionally strong at $109.4 million, representing growth of 33% compared to Q4 of 2011. This was assisted by a strong contribution from Sagemcom in its first full quarter as part of Sierra Wireless.

As our revenue has grown, our profitability metrics have shown steady improvement, moving from a significant non-GAAP loss position in 2011 to modest non-GAAP profitability in 2012. The second half of 2012 was solidly profitable, anchored by an exceptional Q4 when strong revenue, gross margin, and cost management drove a non-GAAP operating margin of 3.4%. I believe that our recent operational performance highlights our ability to drive significant organic and inorganic growth and improving profitability metrics as we scale the business.

Q4 was also eventful from an operational standpoint as we continue to secure new design wins in key segments and launch new products that will help drive our business forward. As you can imagine, new design wins are key to our business. They bring us new customers, new opportunities, new segments, and provide visibility to future revenue growth. During Q4 we continued to have success in securing new design wins in a number of our key segments. We continue to see expanding activity in the networking space as router and gateway OEMs position themselves for fixed line alternative opportunities around the world. We believe that 4G is a key enabler of this market opportunity as wireless Internet speeds are now matching, and in many markets surpassing, legacy wireline speeds. We believe the wireless replacement opportunity is poised for secular growth and that we have a dominant design win share in the space.

We also continue to experience a tremendous level of activity with automotive and transportation OEMs and successfully secured design wins for new programs during the quarter. We believe that the connected vehicle represents another secular growth opportunity, and that over time, nearly every vehicle sold will have embedded connectivity. We continue to experience design win share gains with PC and tablet OEMs as well. We've seen significant revenue growth with PC OEMs in the past year and believe that the strength of our 4G and Win8 position, low market penetration, and the exit of key competitors will enable us to drive continued growth in 2013.

With respect to new products, we have now released the next generation AirVantage M2M cloud and announced 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, and to us capturing more value from every connected device. We also introduce our second-generation of 4G embedded modules, bolstering our 4G leadership position. We have design wins for these next-generation products and expect to begin commercial shipments in the first half of this year to customers in the PC OEM and networking segments.

With that, I'll now turn the presentation back over to Dave, who will take us through a more detailed look at fourth quarter results and guidance for the first quarter of 2013.

Thank you, Jason.

I'd like to note that 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 you will have noted from our press release, the pending sale of the AirCard business triggers a change in how we present our financial statements. As a result, we are reporting the AirCard business as a discontinued operation. To assist you with this new basis of presentation and specifically provide historical comparisons for our Continuing Operations, we have posted in the Investor section of our website a supplemental financial information package for these Continued Operations, which include GAAP and non-GAAP income statements for both 2011 and 2012 by quarter as well as a reconciliation of GAAP to non-GAAP results. So, I encourage you to have a look at that and see the basis of presentation historically.

But before we move to this new reporting format, let's first look at our consolidated business, which includes the discontinued AirCard operations, and compare this to the consolidated guidance we provided for Q4. With a very strong fourth-quarter achieving total revenue of nearly $164 million, which is toward the higher end of our guidance and, within this, our machine-to-machine business slightly exceeded our expectations for the quarter. On a GAAP basis we had total earnings from operations of $3.2 million. On a non-GAAP basis, our earnings from operations were well ahead of guidance, coming in at $10.2 million compared to a guidance range of $7.5 million to $9 million. GAAP net earnings include a significant one-time benefit from the recognition of a tax asset as a result of the pending sale of our AirCard business.

This resulted in approximately $13.4 million or $0.44 per share tax recovery, and drove GAAP net earnings to $19.6 million or $0.64 a share. On a non-GAAP basis we achieved very strong net Q4 earnings of $10.3 million or $0.33 a share, well ahead of our guidance. This stronger-than-expected profitability in the quarter allowed us to release an additional tax asset valuation allowance in the normal course, which negated taxes in the quarter. I should also note that our fourth quarter non-GAAP earnings exclude the impact of the above-noted transaction tax benefit. 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 and disposition costs, acquisition amortization impairment, acquisition costs, integration costs, restructuring costs, FX gains or losses on foreign currency contracts, as well as translation of balance sheet accounts and certain tax adjustments. As I mentioned a moment ago, supplemental material is on our website, which will further illustrate the impact of the discontinued operations carved out on our historical results.

I will now focus on the results from our continuing business and, in particular, our non-GAAP results. For the full-year our continuing business delivered $397 million of revenue and is essentially breakeven, delivering $900,000 of profit at the operating level and a $400,000 loss of the net level.

Q4 was exceptionally strong, with revenue of $109 million and gross margins of 33.2%, the highest of the four quarters. Q4 includes a revenue contribution of $15.5 million from the M2M operations we acquired from Sagemcom. Q4 was the first full quarter for these products in our results. Q4 non-GAAP OpEx was $32.6 million, including expenses from the acquired Sagem M2M business. During the quarter we benefited from a one-time project funding from a partner, which served to offset certain R&D expenses. Without this funding, OpEx would have been approximately $34 million for the quarter. Solid revenue and improved gross margins resulted in non-GAAP Q4 operating earnings of $3.7 million, or an operating margin of 3.4%; and net earnings of $4.5 million or $0.15 per share. This excludes the impact from the transaction-related tax benefit which I spoke about earlier.

We continue to make good progress in improving our profitability. We experienced year-over-year revenue growth of 33% in Q4. Both our M2M embedded modules business and our intelligent gateways business delivered strong year-over-year revenue growth. Sales of embedded modules to PC OEMs were also up substantially year-over-year as we introduced new products and executed on new design wins in this area. Non-GAAP gross margin as a percentage of revenue was 33.2% in the fourth quarter, up considerably from 30.7% a year ago. Favorable product mix and product cost reductions drove this improvement. The combination of revenue growth and improved gross margin, partially offset by higher operating expenses as we integrated the M2M business acquired from Sagemcom, drove a significant improvement in profitability year over year. Non-GAAP earnings from operations improved to $3.7 million in Q4 of '12, up from a loss of $4.4 million a year earlier.

Turning to the balance sheet, our financial capacity remained strong. During Q4, cash generated from operations was $10.5 million, less CapEx and other expenditures, resulted in a net $4.1 million increase in our cash balance, to end the quarter at $63.6 million. Following closing of the AirCard transaction, we expect to have in excess of $160 million of cash. In terms of deploying this capital, we're actively evaluating additional M2M acquisitions to accelerate growth and create value. We have a well-established track record of acquiring good companies, integrating them well, and creating value as a result. We've also received approval from the TSX to implement a normal course issuer bid to buy back up to 5% of our outstanding shares.

Moving on to guidance for the first quarter, providing first-quarter 2013 guidance on our continuing operations. On a sequential basis we are expecting revenue to be down compared to the exceptionally strong results in the fourth quarter of 2012. This reflects first-quarter seasonality and product transitions with some of our customers. In the first quarter we expect our gross margin percentage to be similar or slightly lower than that of Q4, and operating expenses to increase as a result of higher new product certification costs combined with the negative impact of the strengthening euro. We expect to incur a net loss of between $1.5 million to $2.5 million in Q1, or a loss of $0.05 to $0.08 per share. Looking forward to the second quarter of 2013, we expect to return to solid sequential and year-over-year revenue growth as well as modest profitability.

With that, I'll turn it back to Jason.

Thanks, Dave.

So, in summary, Q4 was an excellent quarter for both the combined and continuing businesses. We delivered strong year-over-year revenue growth, strong gross margin, and earnings that exceeded our expectations. As we look forward to Q1, we expect to experience some seasonal softness in our Continuing Operations results, followed by a quick return to solid sequential and year-over-year revenue growth and modest profitability in Q2. Also during Q1, on we expect to complete a major step in our transformation into the pure play leader in M2M and connected device solutions.

We are on track to close the sale of our AirCard assets and operations to NETGEAR in March, unlocking value in our AirCard business and providing more focus and financial capacity to drive the new Sierra Wireless forward. The new Sierra Wireless will be an established leader with sharpened focus on capturing the M2M growth opportunity. I believe we are extraordinarily well-positioned to accomplish this mission. We are the clear market leader with an extensive blue-chip customer base, broad product portfolio, global capability, and solutions across the value chain. Organically, our goal is to continue to drive revenue growth and expanding profitability as we leverage our leadership position, capture share, and expand into new segments and geographies such as Brazil.

Post closing we expect to have approximately $160 million in cash and no debt. We plan to put that cash to work in acquiring great M2M companies that help us expand our position in the value chain, strengthen margins, and drive growth. I believe our track record of doing this is strong. Since 2008, we've grown our continuing business organically and through acquisition from $158 million to nearly $400 million, while improving our margin profile and defensibility. Our aim is to do more of this, and in so doing deliver a great return for our shareholders.

Andrea, that concludes our prepared remarks, and we can now open the line for questions.

(Operator Instructions)

Mike Walkley, Canaccord Genuity.

Yes, thank you very much, this is Matt Ramsay on for Mike. Congratulations, guys again, on the sale of the consumer business to NETGEAR and the solid Q4 results.

Thanks, Matt.

I just wanted to jump in a few questions from us. I guess the first one maybe some more color on the softness in the Q1 guide for the retained business. You mentioned a couple of things I guess in the prepared remarks. One was in particular a product transition with some of the customers. Maybe you could shed a little light on that and maybe the mix of the softness from the M2M business or from PC OEM business.

Sure. I'll take that Matt. This is Jason. Q1 guide -- we're guiding down sequentially as you saw. That is coming off of an exceptional Q4 so the comparison period was quite strong, but a little lower than desired, nonetheless. The Q1 guide does represent about 9% year over year growth but still not quite where we want it to be. So what is driving that? And we mentioned a couple of things.

Seasonality, and you know if you look back historically you will say well, we don't actually see the seasonality in your numbers. And that, frankly, is because often underlying seasonal demand trends are covered up by other things like new product launches or exceptional business activity. So I think it this case we are seeing kind of true first-quarter seasonality impact both the end-user demand as well as the revenue projection. And then a few -- I would say handle a product transitions, Matt, and it's a fairly broad-based but I would point to primarily a little bit in PC OEM as we are transitioning some customers to new LTE platforms. And also our solutions and services business where we've just recently launched some new products, and customers are taking a little while to transition to those new products.

Thank you very much for that. I guess following up again one more question on the PC OEM business. It was obviously really strong this year, that being 2012 relative to where was in prior years. And now with Ericsson and Novotel more recently announcing they're exiting that business, could you maybe talk about your opportunities for share gains, and is there a potential to get back toward that $20 million a quarter run rate that was kind of pre Qualcomm's entry into the market a few years ago?

Yes, I think before getting too far ahead of ourselves, you're right. It's been a nice growth business for us. We've -- we grew at 55% year over year -- full-year, year over year, and our expectations '13 are for continued growth, probably not at a 55% pace but continued growth. And to your point, we believe part of that growth will be coming through share gains. In fact, I would venture to say most of that growth is coming through share gains. And we also expect to see, although we don't have perfect visibility on this yet, but we expect to see a bit of a mix shift as well favoring LTE, which hopefully will mean good things from an ASP standpoint.

And then, finally, I'll point to penetration. The market still is I would say sub-scale from a penetration standpoint, and that made lead you to be disappointed. We're actually not, because we think it gives us a lot of headroom to grow through increased market penetration as well. So we do think it's going to grow. Not prepared to say it's going to go to $20 million a quarter at this point in time, but our expectations are for growth principally driven through share gains.

All right. Great. And I guess one last question for Dave, and then I'll jump back in the queue. Around OpEx, you had given the $32.5 million for Q4 for the retained business, and it sounds like it's going to be a bit higher in Q1. Could you talk about a little bit about what you think the baseline run rate for OpEx could be going forward, and should we expect it to grow were be relatively flat? And then maybe the contribution of those certification costs you brought up in the prepared remarks for Q1 OpEx.

It's Dave. So just starting with the Q4 run rate the $32.5 million incorporated some I'll call them unusual contribution from a partner that offset some R&D on a specific project. So think of the Q4 run rate at closer to $34 million, and then from time to time we have some lumpy costs associated with new product introductions and certifications around those new products, and we're going to see that this quarter Q1. So expect Q1 to be a little bit above the $34 million run rate we saw in Q4, because of the certification costs that we expect to see and also things like the euro. The euro has come up here, and that increases our cost base with our team in Europe. So a combination of those things puts us around $35 million plus or minus, and I think that is where we will be for the near-term.

Thank you very much. Look forward to seeing you guys in Barcelona.

John Bright, Avondale Partners.

Jason, Dave, I kind of want to walk through this step-by-step to understand it a bit better. Let's start on the product mix from AirPrime, Airlink and AirVantage. Kind of give me a sense of the gross margin profile of those today and relative size of those today.

So, John, it's Dave. You know our M2M business is running gross margins in the low 30%s. That's our M2M embedded business. So somewhere between 30% and 35% would be a representative number there for gross margin in that spot. PC OEM would be below that. Our AirLink intelligent gateway router business would be substantially above that and, in fact, those products on average blend out to be pretty close to 50% gross margin.

And the size with respect to (multiple speakers) in the quarter?

If you go to the last page in the press release there is a table there breaking out the revenue by product category.

Perfect. I didn't see that. I'll find that. Next question. How much does your financial visibility improve as a pure play M2M company. You mentioned design wins during the call. Kind of give us an idea A, what is the time to market on those design wins and how much more of the stability do have as a pure play financial visibility?

This is Jason, John. Visibility I think is significantly better. If there's a surprise, it tends to be a smaller surprise in either direction up or down than with the AirCard business. The AirCard business has, by the way great business, profitable business, but it can be volatile because of the high amount of customer concentration and the vagaries of the consumer market. With respect to the machine to machine business we have no 10% customer, so it's a highly fragmented customer base. And think of it as we grow we're layering new customers and new design wins on top of a fairly stable base. So we've got pretty good visibility and good I would say levers and dials to drive the business forward.

(Inaudible -- multiple speakers) on the time to market on design wins, too

Yes, so time to market on design wins -- you know that is -- there is a pretty broad range they're. I'll be very candid. I would say there -- a short period of time would be six months from design win to actual commercial shipments. That would be I would say on the extraordinary short part of the spectrum. And to the other end we could be two years from a design win to commercial volume shipments. And we've got customers to go across that -- different customers who go across that entire spectrum.

Last question surrounds the acquisition opportunities. First of all, would you say that you believe the current M2M organic profile -- growth profile for the market is call it 10% to 15%? That's a kind of statement I want to see if you agree with that first. And then secondly how far along the path M&A have you already traveled? Kind of give us a sense of that, maybe discuss the fragmented market where -- which verticals that might offer the most attractive low hanging fruit.

Yes I think your growth expectation is fair in the short-term. That's the way we're thinking about the short-term growth opportunity. With respect to our M&A funnel I would characterize it as active. And we're having I would say a number of conversations with management teams and working with outside advisers as well to keep the funnel going. And I'd say there is probably one or two quite actionable targets in the funnel as well, but, as you know, M&A takes time. So that does mean a deal gets announced next week. It could still be several months, but my expectation is we will be busy on the deal front in 2013.

With respect to themes of the kinds of company in the M&A funnel we -- we've got a Pareto of kinds of companies we're looking at, and favored companies are about expanding our position in the value chain, plainly put. And there is two themes there. One is higher margin terminal devices of various kinds, much like our AirLink, gateways and routers and also solutions and services, so perhaps building scale on subscribers that bring recurring software or other services revenue.

Thank you and congrats.

Thanks, John.

[Paul Driver], RBC Capital Markets.

Looking at the supplemental information, the gross margins in your M2M business probably averaged about 31% over the last couple years versus 33% this quarter. How sustainable are gross margins were at the 33% level? And then should we expect further margin expansion as you grow the business, or is this quarter a little bit of an anomaly?

Paul, it's Dave. One thing to keep in consideration as you look at our 2012 -- our gross margin profile. In the first part of the year we did not own Sagemcom so we saw a benefit of Sagemcom in the fourth quarter for instance included in that 33.1% just because those products were running above the corporate average and blending up gross margins. So that's one reason among many as to the increasing trajectory. We've also done well on reducing product costs. We've got scale on the M2M side of our business as well. So, all of those things and then other elements of product mix including a fairly successful Q4 with our intelligent gateways business. So all those things combined to drive the Q4 margin to where it was. So how sustainable is that? When we think of a long-term model, Paul, gross margin is somewhere there to 35% is really where we are thinking of long-term model gross margin.

Thanks. In terms of the operating leverage on the M2M business, it seems like there's probably less operating leverage in the AirCard business, because it is a much more fragmented customer base, but it's probably not linear with revenue. Can you walk through just what are your thoughts on operating leverage here as you grow the business organically and as you later on acquisitions.

Yes, no question the AirCard business is a more highly levered model, although it can be very lumpy because you are on that treadmill of fairly rapid technology refreshes. But, so there is less leverage in the embedded side of the business, but I would say with our current investment in our capability, it feels like we are fully invested in terms of having worldwide capability to continue to develop and support -- continue to develop new products and support existing products. We don't have to increase OpEx significantly as revenue increases here over time. I think we're coming off of a pretty full base of capability right now that we can leverage without adding too much to those cost. It will be some lumpiness with respect to cert costs as we enter these new products, but that comes and goes with those introductions.

Okay. And related to that I think you've always mentioned in the past that you been investing in your M2M business whereas the AirCard business was more of the cash cow. Now as a M2M pure play how will you balance investments versus delivering a return on that investment, and if you could try to put a timeframe around that if you could?

Yes, most definitely the past three years have been heavy investment period for new M2M products. And we've invested heavily on the other side, too, with 4G -- 4G products. But with respect to M2M, we've heavily invested in new technologies. We've heavily invested in the platform. And I think we're sitting at this point where it's time to monetize those investments. And go out and sell hard those new innovative products and leverage the investment that we have now. In terms of a timeframe, difficult, difficult question. I think what we do see is very good growth prospects in this business, and we've got the cost structure that supports a larger business. And so if those growth prospects materialize, I think we're in good shape to begin to earn higher level of profitability and return for our shareholders.

And I would echo what Dave said, and I point to some evidence, too, Paul. If you look at our non-GAAP earnings from operations -- I should say non-GAAP loss from operations in 2012 and our continuing business it was negative $22 million, right? So, with call it roughly the same cost structure, we've grown -- we have kind of grown into the -- we've grown into the cost structure I think is the way to -- is the best way to describe that. And, as Dave said, we believe we are fully invested. So we're not planning to stop any of the investment programs or stop any of the programs that may be in the queue, but we're certainly not considering ramping investment. We believe we've got the kind of cost structure that can drive growth, and I think you'll see improving leverage and margin expansion over time.

And then the other part of your question was the acquisition side. So, from that perspective definitely focused on complementing that organic growth with M&A, as Jason spoke about a moment ago, and I think we do have a good track record of buying well and integrating well. Did AirLink in 2007, Wavecom in 2009, Sagemcom in '12 -- middle of last year. And those have all been successful value drivers in our model so I think we will carefully step through that part of the plan as well.

Okay, thanks very much. I'll pass the line.

Richard Tse, Cormark Securities.

Yes, just on that leverage question. So if you were to kind of go into consolidating your current module markets further would there not be a tremendous amount of offering leverage from their perspective of R&D and G&A for instance? And you're saying here you're ramped up R&D. Is that not sort of a good path to go down just from a scale perspective or am I missing something here?

It depends on the target, Richard, right? Take Sagemcom business. That was an asset purchase that had a very kind of narrow OpEx scope with respect to product people and R&D people -- no G&A, for instance. Whereas if you buy a fully loaded company with a target cost structure, sure, there's going to be synergies there.

Yes because I can probably name a couple of them and have -- you probably take up $40 million in costs, and that's probably like $0.60 or $0.70 in earnings for you guys potentially.

We could probably name those guys, too. It's a fair point. You make a very fair point, and those names have to be on the list for consideration. You know again though I would say, if you look at the priorities in the funnel, they are more heavily weighted to value chain expansion. So the kind of products that can drive not just improved operating margin but improved gross margin profile as well in the form of higher value hardware or -- and/or services. But consolidation is definitely an idea that's on the table, too.

And then in regards to the baseline OpEx so I think you mentioned $34 million -- $35 million. If you look at the operating number that you had for continuing operations this past quarter, would it be fair to say it's based on that increase in cost? That $0.40 is kind of a reasonable run rate number here for the continuing operations once you have all this divestiture done?

Yes, I'm not going to comment on sort of future EPS in that context, Richard.

Okay. That's what I'm thinking okay.

I think you got the pieces right. You know where we are targeting gross margin. You've got a sense of the OpEx run rate, and you know the growth opportunities so.

Great. Thank you.

Todd Coupland, CIBC.

Just wanted to dig into the seasonality a little bit. Can you talk a little bit about what types of products are more susceptible to slowdown in Q1?

Yes, Todd, this is Jason. I would say, frankly, it's pretty broad based. I don't think there's a product theme there. You know this is something that Wavecom, as an example, pre-acquisition has experienced year over year in their business. So it's a fairly well-established pattern I would say in terms of underlying end-user demand and not specific to any one product.

Okay. And then the bump that you're expecting in Q2 in terms of snap back in season -- snapback in revenue, is that mostly seasonality, or are you banking on some new design wins? And, if you are, can you maybe talk about the sectors and how it would flow into the business over the next couple quarters?

Yes I would say that the primary theme there is a -- is kind of getting through the Q1 seasonality and kind of a rebound to normalized levels. That is the primary theme. Having said that, in addition to that, I think we do expect a small handful of new programs to begin to ramp a bit., including in automotive -- automotive networking and PC OEMs.

And just to so we understand the type of application in a car. What kind of service would you are bringing to that car? Is it just emergency call capability or what else are you bringing to the car?

You know it's a wide range, Todd. We see the very basic application is as you said. It's crash reporting. And that is, as you may know mandated, in the EU that every car has to be equipped with E911 capabilities. So, you hit a tree with your car, and a message is automatically sent to emergency dispatch. That's kind of the table stakes functionality. And then from there you work your way across a pretty wide spectrum right up to connected infotainment systems that require a 4G connection, so real-time access to the Internet, streaming media, et cetera. And then there's a whole bunch of stuff in between kind of you know the meat and potatoes in between. Just think of applications like OnStar, as an example. Right, so in addition to drivers safety applications a bunch of driver convenience and roadside assistance applications. That's kind of the spectrum of that.

And then just lastly sort of bounce back to a targeted growth rate of 15% for the business. Is that mostly just the economy getting stronger, or is there enough in your pipeline where you can actually step up to that growth rate at some point in the quarters over the course of 2013 without an economic tailwind?

Yes, I think you know I think we're thinking about it as 10% to 15% without dramatic improvements in Europe as an example. And in fact in 2012 we put up organic growth of about 13% in the continuing business. Of course, that came across a mix of business, not just M2M. So I think we're pretty comfortable thinking about short-term growth in the 10% to 15% range, and if we have a meaningful significant and meaningful macro recovery in key regions like Europe, then perhaps we can get above that.

Okay. Sorry one last question, my apologies. And, if it's of the disclosure, just tell me, and I'll look it up. What are the revenue splits of the run rate business from a geographic point of view?

It is not in the supplemental information, Todd. Let me just get that for you.

Don't know that we have that perfectly split out yet, Todd. I believe we have that for M2M, but we haven't layered into that data the PC OEM.

That's correct. That's correct.

Then just I don't know if you could provide directional color on this -- Europe as a rough percentage of the total? Is it like 50% of the business or a third?

No, no. Europe as a percentage of revenue of the continuing operations is about 23%. In Q4 it was about 23%. So Europe actually popped up a bit for us as a result of the Sagemcom contribution.

Okay.

So, organically, it was -- continued to kind of be flattish, but we layered on a full quarter of contribution from Sagemcom. So that popped up and represented 23% of continuing operations.

Great. That's helpful. Thanks very much, guys.

And just a bit of added clarity there, Todd. That is a revenue numbers, so, while some of our customers build their products in Asia and ship them to Europe, if we're shipping modules to that OEM in Asia, that for us is AsiaPac revenue, even though the end-user maybe in Europe. So when we say 23% that means sales, shipments, actually made to OEMs and customers in Europe. Hopefully that's not confusing for you.

That's straightforward. Thanks a lot, guys.

Peter Misek with Jefferies.

Hi, this is Jason North for Peter. Looking at the cost structure and [growings] of the cost structure over the course of the year, where in particular do you see the most leverage? Or, said another way, which to initiatives are you looking at to return the most? Thanks.

In terms of the product lines that would drive growth, Jason, is that would you are thinking?

Product lines, geographies, new verticals, et cetera.

Sorry so maybe I'll touch that. So will put cost structure off to the side and focus because cost structure as we said we believe we are fully invested. We've got a cost structure that supports a larger business and we've got -- we believe we can leverage the cost structure we have to scale the business. So where are we going to get the scale, the revenue growth, and I would point to, you know, it's broad-based. We've got I would say growth expectations across our key product lines and key segments. Our themes that have been driving us forward in the recent past, and we think will continue, include automotive, networking, energy and PC OEM, to name four. But there is probably another four segments that are also important contributors. But if I look at those four -- those four segments represented -- don't write this number down -- but those four segments approximately 40% of our overall continuing business revenue mix.

Okay.

Steven Li, Raymond James.

Jason, the 10% to 15% growth range you just gave, is that all organic and incremental couple quarters from Sagemcom you didn't have in 2012 is on top of that?

No, so when we -- when I say 10% to 15%, I'm thinking full year 2012 to full-year 2013. So it does include a smaller contribution from Sagemcom in '12 and a full year of contribution in '13.

Okay great. And just one other question on your gateway business, it was up about 20%. Is that rate sustainable, or was there someone else in 2012?

We sure hope so. We're off to a little bit of a slower start than we would like to here in Q1. But I would say, in general, Steven, we are quite bullish on that business, notwithstanding some customer transition things here in Q1. So I don't know if we will get 19% growth this year out of that business, but certainly we see that business as a growth opportunity. And as I said earlier, it's got a very nice mix impact on gross margin and operating margin. So certainly we think we can grow it. I wouldn't put a 19% handle on it right away, but we believe we can grow it here in 2013.

Okay great. Thanks.

Andrea, I think that was the final question, so we have completed the call. I will think everybody for participating and, Andrea, you can wrap things up and disconnect.

Ladies and gentlemen, thank you for your participation in today's teleconference. You may now disconnect.