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Sierra Wireless, Inc. (NASDAQ:SWIR)

Q2 2010 Earnings Call

July 29, 2010 5:30 PM EST

Executives

Jason Cohenour – President and CEO

Dave McLennan – CFO and Secretary

Analysts

Amir Rozwadowski – Barclays Capital

Mike Abramsky – RBC Capital Markets

Chris Umiastowski – TD Newcrest

Todd Coupland – CIBC

Gus Papageorgiou – Scotia Capital

Operator

Thank you for participating in the Sierra Wireless Second Quarter 2010 Results Conference Call. I’d like to introduce your speakers, Jason Cohenour and Dave McLennan.

Mr. Cohenour, please go ahead.

Jason Cohenour

Thank you, Steve, and good afternoon, everyone. Thank you for joining today's call and webcast. With me, today on the call, as Steve mentioned, is Dave McLennan, the company’s CFO. As a reminder, today's presentation is being webcast and will be available on our website following the call.

The agenda for today's call is as follows. I’ll first provide a general business update and then turn the call over to Dave, who will cover Q2 2010 financial performance and Q3 financial guidance. I’ll then return for some brief summary comments and then go to Q&A.

As a reminder, today's webcast and call is subject to the company's Safe Harbor statement. We’re not going to read the statement into the record today. The statement is being displayed on the webcast on slide number two at this time, and I’ll pause now for everybody to read it.

This presentation 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’ll begin with a brief financial summary of our second quarter highlights. Overall, I’m very pleased with our results. Revenue of a $159.1 million was an all-time quarterly record and represents solid sequential growth of 5% and strong year-over-year growth of 18%, and we accomplished this in a very challenging component supply environment.

Our strong results were underpinned by continued broad based demand across both Machine-to-Machine and Mobile Computing. In M2M, we’re very pleased to report that our strategic investments are driving strong results and a leading market position. In the second quarter, M2M revenue was up 53% year-over-year and contributed more than half of our total sales.

We also launched important new products for key segments and geographies, while securing new design wins and continuing to expand our position in the M2M value chain. During the quarter, we also announced that we had achieved the number one global market share position in wireless M2M, a strong endorsement of our strategy and execution in this important and growing market.

In Mobile Computing, strong demand from new AirCard product launches and new customer wins drove revenue up 21% sequentially in the quarter. Our new AirCard products have gained excellent traction in the market and sell-through is strong. These trends combine with additional planned new product launches are driving our expectations for continued AirCard growth in the second half of 2010.

Furthermore, our efforts with PC OEMs continue to gain momentum with new strategic design wins that we expect will drive significant revenue growth in 2011.

During Q2, we also continued to make steady progress on managing cost. Lowering non-GAAP OpEx to $41.7 million, a 9% improvement compared to Q2 of 2009. Our strong revenue performance combined with good cost management led to better than expected non-GAAP earnings from operations of $4.7 million and non-GAAP EPS of $0.14.

And, while delivering strong results, we also continued to bolster our strategic position in our key markets with important investments, geographical expansion, new products, and new customer wins, all of which fuels our expectations for continued growth and expanding profitability.

Most of you know our Mobile Computing business quite well, while some of you are still [inaudible] the speed on our M2M business, which as I mentioned, now represents more than half of our revenue. So, at this point, I’m going to take a moment to share with you a little more color on our view of the strategic opportunity.

The M2M market includes a broad range of connected devices and solutions, covering consumer electronics, such as e-book readers, PNDs, cameras, and gaming devices, as well as industrial and enterprise solutions, such as automotive, telematics, smart metering, networking, payment, security systems, and healthcare.

We believe that these new connected devices and solutions will rapidly enable the emerging internet of things, which represents a massive opportunity and the next big thing in wireless. Most wireless analysts and ecosystem players agree, ABI Research predicts, the global market for connected devices will grow from 32 million units shipped in 2009 to a 146 million units in 2014, compound annual growth rate of 35%.

There are a number of catalysts underpinning this expectation of tremendous growth and I’ll touch on just a couple of them now. First, operators are strategically focused on M2M. Most operators see M2M as the next growth wave and are investing aggressively to provide competitive services and access to a broader range of solutions, while also lowering their service delivery costs with a goal to rapidly increase the number of connected devices on their networks.

In fact, for many operators, tracking the number of connected devices on their networks has become a key metric for measuring corporate performance, a metric that was largely ignored just a year-ago.

Second, our customers including OEMs, solution providers and system integrators are incorporating wireless communications into their products and services at a rapid pace, while at the same time creating sometimes game-changing business models. This adoption of wireless is happening across almost every vertical segment from connected cars to smart-meters to advertising.

Looking forward, we feel we are the best positioned wireless solutions company in the world to capture this growth opportunity. We have the number one global share, the industry’s broadest product line, the strongest global footprint and offerings across the entire M2M value chain.

We believe that occupying the leadership position in the wireless M2M market should deliver excellent returns to our shareholders overtime.

Supporting this expectation was the recent acquisition of Centurion, the number two player in wireless M2M by Gemalto for approximately 210 million US, attributing an enterprise value to Centurion of approximately 1.1 times their trailing 12 months revenue. We believe this transaction represents an important valuation benchmark for the industry, including our M2M business, which has trailing 12 months of revenue of over $300 million.

Moving to our M2M business results, which as a reminder, includes revenue from sales of our AirPrime embedded modules to M2M customers, sales of our AirLink intelligent gateways, as well as revenue from AirVantage services platform.

In Q2, we once again delivered strong M2M performance. M2M revenue in the quarter was $83.6 million, up 53% compared to the second quarter of 2009, and down 6% sequentially. As expected and as discussed on our last earnings call, the sequential decline was due to exceptionally high demand in Q1, related to the channel launch cycles of consumer device customers. In all other M2M segments, we saw solid sequential growth over Q1.

During Q2, the pace of new design wins continued to accelerate around the world, driven by increased market activity overall, as well as share gains in key segments. Design wins and market activity were particularly robust in automotive, networking, sales and payment, smart-metering, and fleet management. We expect our recent design wins to contribute to our results in 2011 and beyond.

Also, during Q2, we continued to invest in expanding our market leading product line to address new market opportunities and customer requirements. Examples include our new AirPrime XM GPS module, a tiny companion device for our intelligent wireless modules that enables optimized system level designs for application such as asset location tracking and fleet management.

We also introduced the new AirPrime Q2668, our first TD-SCDMA module designed specifically for China Mobile’s M2M service offering over their 3G network. We plan to leverage this new device to solidify our position in key M2M markets in China, such as smart-metering and wireless payment.

With respect to our value chain expansion efforts, both AirLink gateways and our AirVantage services delivery platform performed well in Q2. The AirLink product line delivered a record $12.2 million of high margin revenue in Q2, driven by both international expansion and strong contribution from North America.

The AirVantage services delivery platform also continued to gain momentum during the quarter. We added important new features to the platform, achieved key customer deployment milestones, and secured new solution design wins in the energy management and outdoor advertising segments.

Overall, we’re very excited about our M2M business today, about the strength of our market position, and about the large and growing opportunity before us.

I’ll now move to our Mobile Computing business, which includes revenue from the sale of our AirCard mobile broadband devices as well as revenue from the sale of our AirPrime embedded modules to PC OEMs.

Our Mobile Computing revenue grew substantially in the quarter to $75.5 million, representing a sequential increase of 21%. Momentum in our AirCard business was particularly strong, driven by new product launches with new and existing operator customers, plus solid sell-through.

Key AirCard milestones in the quarter included the launch of our new AirCard 250U, 3G/4G device with Sprint and Clearwire, adding an important new operator customer, while also reinforcing our leading share position at Sprint. And we built on our overdrive success at Sprint, launching two new variants of our 3G/4G Mobile Hotspot with both Clear and Time Warner.

During the quarter, we also made excellent progress on important new AirCard R&D programs for HSPA plus, HSPA plus Dual Carrier, and LTE. We expect these programs to result in new product launches in the second half of this year and the first half of 2011.

With PC OEMs, we’re making strong progress in energizing our position in the market and have secured important new design wins with Tier 1 and Tier 2 OEMs, for platforms scheduled to launch in 2011. We expect to see significant revenue contribution from these design wins throughout 2011.

Overall, we see solid momentum in our Mobile Computing business, and we expect that our strong sell-through, new design wins and planned new product launches will drive sequential growth in Q3 and beyond.

Before turning the call over to Dave for a more detailed financial review, I’d like to make a comment on the transition occurring here at Sierra Wireless. The chart on this page clearly illustrates the continued success of our transition efforts, both in terms of revenue growth and diversification.

Our higher margin M2M revenue is now 53% of total sales and we’re successfully navigating the transition from a company’s solely dependent on Mobile Computing to a diversified leader in wireless solutions for both M2M and Mobile Computing. And as I said on our last earnings call and we’ll repeat today, I believe we’re making excellent progress on the strategic endeavor and that overtime will drive strong returns for all of our stakeholders.

Dave will now take us through Q2 financial results and Q3 guidance.

Dave McLennan

Thanks Jason, and good afternoon, everyone. We’ll report our financial results on a GAAP basis. However, we also present non-GAAP results in order to provide a better understanding of our operating performance. Non-GAAP results exclude the impact of stock-based compensation expense, acquisition amortization, Wavecom integration costs, restructuring costs, FX gains or losses, tax adjustments and non-controlling interest related to the non-GAAP adjustments.

As Jason stated at the beginning of the call, consolidated revenue in the second quarter was a $159.1 million, that’s up 18% from the second quarter of 2009, and up 5% sequentially from Q1.

Machine-to-Machine revenue in the quarter was $83.6 million, up from $54.6 million in the second quarter of 2009, represent a year-over-year increase of 53%. Sequentially, M2M revenue declined 6% from Q1.

As discussed on our last earnings call, we expected this decline, which resulted from lower sales of consumer M2M products, as shipments normalized following initial launch volumes in the first quarter. In other M2M segments, we saw solid sequential growth from Q1 to Q2 of this year.

Mobile Computing in the quarter was $75.5 million of revenue down from $80.7 million in the second quarter of 2009, a year-over-year decrease of 6%. However, on a sequential basis, Mobile Computing revenue increased by 21% from $62.6 million in the first quarter of 2010. This strong growth was driven by new product launches with key operator customers.

The growth in Machine-to-Machine has led to good diversification methods as well. M2M revenue was 53% of total second quarter sales and Mobile Computing revenue was 47%. This is the second quarter in a row that Machine-to-Machine drove over the majority share of our revenue and that represents a significant change from the second quarter of 2009, when M2M was only 40% of our business and pre-acquisition of Wavecom, it was only 20%.

Furthermore, our customer concentration has improved. Our top three customers represented 40% of revenue in Q2, compared to 47% in the second quarter of 2009. In Q2, our top three customers were AT&T, Sprint, and Barnes & Noble.

Our broadly diversified product portfolio servicing both M2M and Mobile Computing markets means we’re less dependent on any one product or customer, resulting in a more stable and consistent financial results.

Moving now to operating expenses, on a GAAP basis, operating expenses were $49.7 million in the quarter, representing a sequential decline of $1.1 million and a decrease of $15 million from $64.7 million in the second quarter of 2009. On a non-GAAP basis, operating expenses were $41.7 million in the quarter, down $4.1 million from the $45.8 million in the second quarter of 2009, and down $600,000 from the $42.3 million in the first quarter of this year.

As a general comment, I think we’ve made great progress in driving cost reductions and synergies since the acquisition of Wavecom in March of 2009, while at the same time, executing on new product development initiatives and growing the business.

On a pro forma basis, combined non-GAAP operating expenses for the two companies, was $48.9 million in the fourth quarter of 2008, which was the quarter immediately preceding the acquisition. Based on non-GAAP operating expenses of $41.7 million in the second quarter this year, we have achieved annualized operating expense savings of $28 million.

We remain committed to further reducing operating expenses, while balancing our investments to capture the growth opportunities in both M2M and Mobile Computing.

Moving on to earnings, we see continued improvement here. In the quarter, our GAAP gross margin was 29%. And, after excluding stock compensation expense, gross margin was 29.1% on a non-GAAP basis. The sequential decrease in gross margin from Q1 was in line with our expectations and was a result of a shift in revenue mix towards newly launched lower margin AirCard products.

The combination of strong revenue growth and lower operating expenses offset the impact of lower gross margins and resulted in earnings growth on both the year-over-year and sequential basis.

On a GAAP basis, the loss from operations was $3.5 million in the second quarter compared to $16.2 million in the same period of 2009, representing an improvement of $12.7 million.

Our net loss was $8.6 million or loss per share of $0.28, compared to a net loss of $5.9 million or a loss per share of $0.19 in the second quarter of 2009. Please note that we had a large FX gain of $11 million in the Q2 ’09, compared to a $5.5 million FX loss in Q2 2010.

On a non-GAAP basis, earnings from operations improved to $4.7 million in the quarter, an increase of $600,000 compared to the first quarter of 2010, and up $1.9 million over the second quarter of 2009.

Non-GAAP earnings from operations in Q2 excludes $3.2 million in purchase price amortization, primarily from the Wavecom acquisition, $1.7 million of stock-based compensation expense, $1.6 million of restructuring primarily related to headcount reductions and facilities charges, and $1.6 million of integration costs as our ERP conversion project and other systems projects related to the Wavecom integration continued.

Turning to the balance sheet, our financial capacity remains very strong. We ended the quarter with a $115.4 million in cash and short-term investments, equivalent to approximately $3.72 per share. The cash balance is entirely unrestricted and the company is debt free.

We’re pleased that we are again generating positive cash flow from operations of $1.3 million in the quarter, despite significant integration and restructuring related charges.

The decreasing cash in the quarter was driven by non-operating expenditures of $3.2 million, related to the purchase of minority shares in Wavecom and a lease buyout of excess office space in Paris as well.

And capital expenditures in the quarter were $4.8 million.

Now to summarize the quarter, this slide presents key GAAP and non-GAAP financial metrics compared to our guidance. I previously commented down the earnings from operations line. So with respect to net income, our GAAP net loss of $8.6 million includes a foreign exchange loss of $5.5 million and net interest expense of a $103,000, partially offset by an income tax recovery of $399,000 and a non-controlling interest and a loss of $82,000.

On a non-GAAP basis, net interest expense was a $103,000, income tax expense was $240,000, and non-controlling interest and loss was $42,000, resulting in non-GAAP net income of $4.4 million, which is above our guidance range of $1.7 million to $3.6 million for the quarter.

I’d also like to highlight non-GAAP EBITDA which increased to $10.3 million in Q2, up from $9.4 million in the first quarter. Please note, a reconciliation of GAAP and non-GAAP results is available on the investor information section of our website for your reference.

As Jason mentioned at the beginning of the call, overall, we are very pleased to be able to deliver result that exceed our expectations and which shows solid year-over-year and sequential improvement.

Moving on to guidance for the third quarter of 2010, we’re providing guidance on a non-GAAP basis, which as previously stated excludes stock-based compensation expense, acquisition amortization, Wavecom integration costs, restructuring costs, FX gains and losses, tax adjustments and non-controlling interests related to the GAAP adjustments.

In the third quarter of 2010, we expect revenue to grow to between a $168 million and a $173 million. Non-GAAP earnings from operations are expected to be between $5.4 million and $6.4 million, and non-GAAP net earnings are expected to be between $4.5 million and $5.4 million or $0.15 to $0.17 per share.

This guidance is based on our expectation that Mobile Computing revenues grow sequentially on new AirCard product launches and continued strong demand.

We expect gross margins to be approximately 28% for the quarter, reflecting a continued shift in revenue mix to lower margin Mobile Computing products. We also expect non-GAAP operating expenses to be approximately flat compared to Q2.

Finally, I’d like to provide some commentary on our outlook for the fourth quarter. ON a sequential basis, we expect, good sequential revenue growth from Q3 to Q4, and a small improvement in gross margin relative to Q3, driven by visibility which we currently have to lower costs for some of our recently launched AirCard products, although we expect consolidated gross margin to remain below 30% in Q4.

We expect stronger revenue and improved gross margin, combined with our continued focus on cost control to results in a further expansion of operating earnings in Q4 compared to Q3.

Please note this guidance also reflects an uncertain macroeconomic environment and is based on current beliefs and assumptions, which are subject to change. Actual results could differ materially from guidance, and the risk factors are described in our regulatory filings.

With that, I’d like to turn it back over to Jason to finish up.

Jason Cohenour

Thank you, Dave. To summarize our Q2 of 2010, we had a great quarter. We delivered record revenue and better than expected earnings. In our M2M business, we secured the leading market share position in the strategic and growing market and continued to extend our lead with new products, new design wins and enhanced software and services capability.

In our Mobile Computing business, we delivered excellent sequential growth, with the launch of new AirCard products and the addition of new operator customers. We also continued to build momentum with PC OEMs, earning strategic design wins with major manufacturers across multiple notebook and module platforms.

We continued our investments in innovation, differentiation, and leading-edge 4G wireless technologies, such as, LTE and WiMAX. And we’re supporting those investments with key customer wins across our major segments. Our strategy and strong execution not only helped us to deliver strong results in Q2, we are also well positioned for continued growth and earnings expansion in the periods ahead.

And so, with that Steve, we’ll open up the line for some questions.

Question-and-Answer Session

Operator

At this time, I’d like to open up for Q&A. (Operator Instructions). And your first question comes from the line of Amir Rozwadowski from Barclays Capital. Your line is now open.

Amir Rozwadowski – Barclays Capital

Thank you very much, and good afternoon, Jason and Dave.

Jason Cohenour

Hi Amir.

Dave McLennan

Hi Amir.

Amir Rozwadowski – Barclays Capital

I was wondering if we could talk a bit about sort of where you see sort of the Mobile Computing. I mean, certainly then a volatile business for you folks, it seems that though you’re benefiting from some products selling. And it also seems as though, visibility seems to be fairly strong moving into the back half of the year. I was wondering if you could give us color not just on the product launches, but what you’re seeing from an end-demand perspective or a carrier support perspective that gives you that cover that we can see sort of a better half of the year versus the first half?

Jason Cohenour

Sure, I’ll take that, Amir. And, I think – actually I think you characterized the main points pretty well. We are – we’ve got the funnel pretty well loaded up, the pipeline is pretty well loaded up with some pretty exciting launches in the back half of the year.

In Q3, Q3 is really still a ramp quarter for our latest AirCard launch, the 250, the 3G/4G device that we just launched with Sprint, plus Clear. So I think we are going to experience a pretty good sell-in period here. Although, I think underpinning that, we were also seeing continued strong sell-through.

In addition, we’ve added a coupe of new carriers which we haven’t seen in a while, and actually we’re seeing a surprisingly strong demand from a – from those new carrier launches. So combination of sell-through from our existing customers, combination of new product launches, plus new carriers give us pretty good visibility for the next couple of quarters.

And in addition to that, as we look farther out, we’re getting pretty excited about our efforts with the PC OEMs. We’ve got the design wins now in not only for Gobi devices, but also our own organically developed LTE devices, and we expect to see those in Tier 1 laptop platforms, beginning to launch in the first half of 2011. So that feels to us like some pretty sustainable runway for the Mobile Computing business.

And I think that might seem surprising to some, and in candidly it is a bit better than we expected just a quarter ago. So I think we’re turning more bullish on the segment.

Amir Rozwadowski – Barclays Capital

And, Jason, you had mentioned that on the Mobile Computing front, you’d expect to see sort of significant growth or perhaps material revenue contribution in 2011. Can you characterize in terms of what that growth trajectory can look like or how much contribution to the business we can expect at some given point in the future?

Jason Cohenour

From the PC OEM specific.

Amir Rozwadowski – Barclays Capital

From the PC OEM, yes.

Jason Cohenour

Yes, I’m going to restrain myself and be carefully not give that specific numbers at this time. But, our view is, some Tier 1 – the Tier 1 laptop OEMs are – they’re selling steady pace of seven digits in terms of platforms enabled with wireless, so we expect to participate in a pretty good portion of that.

Amir Rozwadowski – Barclays Capital

Okay, that’s helpful. And then, it seems as though that some of the cost reduction efforts have to come to fruition here in the second quarter. I was wondering if you could give us color in terms of, is this sort of from an OpEx perspective, where you expect steady state OpEx to be or is there further room for improvement or how we should consider that?

Jason Cohenour

Well, we remain committed to get to the $40 million mark. So what we’re seeing I think in our guidance is a couple of competing factors. One is, cost is coming out naturally as a result of finishing up the integration with Wavecom, but that is somewhat offset by new product launch expenses. So we are seeing a bit of a lift in things like certification expenses and marketing expenses related to product cost. So I think getting to the $40 million market, I think we have pretty clear path on how to get there and we’re committed to get there and to be there at a – on a sustained basis.

Amir Rozwadowski – Barclays Capital

Great. Thanks for the incremental color.

Jason Cohenour

Sure.

Operator

Your next question comes from Mike Abramsky with RBC Capital Markets. Your line is now open.

Mike Abramsky – RBC Capital Markets

Thanks very much. Hi, guys.

Jason Cohenour

Hi Mike.

Dave McLennan

Hi Mike.

Mike Abramsky – RBC Capital Markets

Hi. I just had a question on margin. I was just wondering, got a couple of follow-up three ones on that. But just from a big picture, what are you doing to improve your profitability operationally and how much do you think you’ve got [inaudible] to go and can you talk about what headwind this factors to savings might be?

Jason Cohenour

Sure. And I think probably there’s a few variables mixed in your question there. One is clearly top line growth. And we are – we’ve got pretty good visibility on how to deliver on that certainly for the back half of the year. So revenue growth is part of it. I think we’ve got that dialed in with a lot of new product launches, good solid design win activity, and that’s got to be backed by new products.

With respect to gross margin, as we look at the – first of all the mix of our business has shifted a little bit to the favor of Mobile Computing and that has a – that has a drag on consolidated gross margin percentage, but we also feel like we’re at a bit of a low point here on our AirCard gross margins.

As we mentioned last quarter, we had some pretty heavy cost of goods in the new products we had recently launched and that did affect us in Q2, will continue to affect us in Q3. But, in Q4, we do have pretty good visibility to cost of goods reductions in key AirCard products.

So that’s – that I think in spite of the heavier Mobile Computing mix, I think that’s going to help us to lift consolidated gross margins back above our Q3 guidance of 28%. So I think we’ve got a pretty good visibility on how to get back to 30%, which is our long-term business model.

And then, the final element in the equation, of course, is OpEx. And, I answered Amir’s question on that. We’ve got – we made pretty good progress on OpEx. We know it’s not quite where we need to be, but we’ve got good visibility on how to get to our $40 million a quarter target. And combination of those three factors I think will put us in a very good position to expand earnings in the second half. You’ve seen in our Q3 guidance. And, as Dave said, we’ve got expectations for further improvement over Q3 in Q4.

Mike Abramsky – RBC Capital Markets

So do you think you have better visibility now with some of the perhaps the pricing things that as you – I think that you missed your prior guidance, previous quarter. Do you think that those factors are – the risk of those factors has caused that has diminished?

Jason Cohenour

Well, I mean, we’re always surrounded by risk factors, right? But I think with respect to our Q3 guidance and our Q4 color commentary, we feel like that’s got a pretty good risk balance to it. We feel like we’ve looked at all of the risk factors that could bite us and have fairly weighed them. So we feel quite bullish on the second half here. So we’re feeling confident.

With respect to risk factors that can bite us, it’s a tough supply chain environment. It seems like we do have a daily fire drill on getting the components we need to meet demand. In fact, in Q2, we had more demand than we could fulfill. And we couldn’t fulfill it, because the supply chain is pretty tight. So we do anticipate that the supply chain, component supply chain is going to continue to be tight certainly through Q3 and perhaps into Q4 as well.

So that’s a – that’s clearly a risk factor. And, of course, competition in the Mobile Computing is always a risk factor, but we feel pretty good with respect to our channel positions at the key customers. And it’s those key customers that are backing the guidance and outlook we’ve put forward so.

Mike Abramsky – RBC Capital Markets

Okay. And –

Dave McLennan

And, with respect to competition, Mike, while it’s there and we are very focused on it, we also have a nicely diversified business now across products in today’s market. So we are less dependent on any one product or customer.

Mike Abramsky – RBC Capital Markets

Okay. And just very briefly, lastly, you felt a lot more bullish I think in this call than you did last call and what’s changed? So is it a demand issue, a supply issue, or things that are – like what has changed for you guys?

Jason Cohenour

I think you are reading our body language pretty well even though you can’t see it. Yes, we are more bullish and it’s demand driven, playing it simple. And so, we feel – as far out as we can see, we’re feeling pretty good about our business.

Mike Abramsky – RBC Capital Markets

Okay, thank you very much.

Jason Cohenour

Sure.

Operator

Your next question comes from the line of Chris Umiastowski from TD Newcrest. Your line is now open.

Chris Umiastowski – TD Newcrest

Thanks very much. It sounds like you guys are definitely more confident and things look like they’re going well Jason and Dave. Wanted to just ask a little bit about the PC OEM business; it sounds like you’re pretty optimistic about some Tier 1 wins, and that sounds a bit new. I know the focus on the past has been on winning some Tier 2 and Tier 3s. And so I’m wondering if you could just comment a little bit about what’s driving these customers back to you. Now, is it LTE driven?

Jason Cohenour

Yes, it’s a combination of factors. We’ve started to talk about PC OEMs a bit more in the last two quarters. And, one key change there has been in the ecosystem and we’re working more, much more closely with Qualcomm in securing these wins as a team, as opposed to competing against each other like we have been in the past two year. So that’s a pretty big ecosystem change here for us. So that causes to be a bit more bullish and candidly more successful in securing the design wins.

Gobi is still a big factor and we’re going to be beneficiary of that with a number of our customers. But LTE is also a factor. So one kind of new development I would say in the last quarter is that, PC OEMs requirements have gone from a quite a singular focus on a single dual mode device to a realization that it’s going to take several devices, several modules to satisfy their end-customer requirements. So, yes, as we look at our Tier 1 wins as an example, they are not only for Gobi, but they’re also for organically developed LTE modules.

Chris Umiastowski – TD Newcrest

Okay, that makes sense. The other question I wanted to touch on is the M2M market. You gave a nice overview at the beginning of in your prepared remarks of different markets that are making use of these connected devices. And I think there has been a view whether it’s correct or not that having a lot of success in something like the NOOK at the Barnes & Noble NOOK, and that you have some concentration there, and it sounds from your revenue disclosure like they’re top three customer, but they’re certainly not a vast majority of your M2M sales by any means. Maybe you can just talk a little bit about what kind of success you’re seeing in various projects outside of consumer electronics.

Jason Cohenour

As I said, we’re seeing a lot of activity in payments, in automotive and networking as an example, so we’ve got – as an example, we have an LTE module win in networking that’s very exciting for us. We’ve got now a number of exciting design wins on automotive. These deals are long ingestion, so it’ll take a while to get revenue contribution from them, but they are very sticky long-term deals.

And I think if you look at multiple years, automotive is going to be a quite a big business for us. So good success there, and we are taking share in payment. We’ve picked up some share with existing customer and we’ve also secured design wins that we believe represent market share gains as well. So it’s pretty broad based, but those are kind of three of the segments to highlight in Q2 anyway.

Chris Umiastowski – TD Newcrest

Okay, thanks for the details, and I appreciate that. And, the last one, I just wanted to touch on supply chain issues and I was hoping you could give us a little bit more detail on what’s boggling down the supply chain these days and what the plan is to resolve those issues?

Jason Cohenour

Well, it’s – it’s unfortunately pretty much everything, but except for baseband, beta we’ve been pretty good on baseband supply. The pain areas for us continued to be memory, that’s kind of top of the list, and power management is also pretty high. Even things as unexpected as plastics and resins are in tight supply.

So what are we doing? Well, we’re putting our balance sheet to work. You’ve seen the impact on cash. You’ve seen an improve – an increase in inventory. And some of that is buying forward as far as we can, right? So that we’re ready to fulfill customer demand and just as importantly react quickly to upsides in demand.

So – but this is a worldwide phenomenon and I think we’re going to continue to fight it at least for the next couple of quarters. It’s probably going to cost us a little bit on the top line. It cost us some on the top line in Q2. It’ll probably cost us some on the top line in Q3 as well. By the way, we do think we have that captured in our guidance.

Chris Umiastowski – TD Newcrest

Okay, I appreciate the details, and I’ll pass to the long line. Thanks very much.

Jason Cohenour

You bet.

Operator

(Operator Instructions). And you have another question from Todd Coupland with CIBC. Your line is now open.

Todd Coupland – CIBC World Markets

Good evening, everyone.

Jason Cohenour

Hi Todd.

Todd Coupland – CIBC World Markets

A couple of question from me. In the past, you’ve talked about how some of the smartphone launches have sucked out the oxygen from marketing programs at carriers. Certainly, we’ve seen an onslaught off late. And, I’m just wondering what’s allowed your product to sort of pop-up in spite of all of that?

Jason Cohenour

We make great products. Kidding aside, these kinds of things certainly vary operator to operator. With respect to the key operators that are driving our demand, they continue to put a lot of promotional efforts behind our products. And in some cases, frankly the demand is stronger than we can meet in the short term.

So, for the operators, these are very profitable subscriptions. It’s also an additional subscription, so it’s not a single subscription with an added data plan. These are second data-only subscription with a – typically a significantly higher monthly service plan which is great for subscriber growth and great for revenue and ARPU. So I think those factors have most of our customers continue to focus on the segment and continue to promote the segment and we’re certainly a beneficiary of that.

Dave McLennan

And also, Todd, the – some of the neat products we have there that are combo 3G/4G like the Mobile Hotspot and our combo USB modem are very unique and meet the carrier’s need, like Sprint, and they heavily promote it, so it fits right down with what they’re trying to promote with driving traffic on to their WiMAX network, and we’ve got the right products for them.

Todd Coupland – CIBC

And is, in terms of the AirCard strength, is it enterprise coming back or is it both consumer and enterprise driving it?

Jason Cohenour

Well, unfortunately, we don’t have clear visibility of what the end customer looks like in all these cases right, because it goes into giant operator channels, and then goes on to corporately owned retail stores, independently owned retail stores, B2B sales, et cetera.

So from a channel standpoint, I can tell you that the vast majority of our sales go out through corporately owned retail stores, but it’s tough for us to have visibility on whether or not that person who comes into the store is a small business owner or a member of a big sales team with a big company or a consumer.

My sense is that it is still business heavy, and we’ve got third-party information that backs that up. But, again, that’s some – that comes with not crystal clear visibility, but it’s probably a lot of business, probably a significant amount of upgrades as well.

Todd Coupland – CIBC

Yes, that makes sense. And then these new carriers that you referenced, that the price you in terms of the demand, have you called out who those are or what geographic regions they’re in?

Jason Cohenour

Well, we did. We mentioned a couple of names on the call. We mentioned Clear and also Time Warner Cable. So – and we were able to leverage our 3G/4G products that we’ve developed for Sprint and parlay into new variants of those same products to launch with these Sprint affiliates.

And I’m pretty excited about Clear as an example. They’re a pure play data service, high-speed data service provide, they fit our model quite well, and our products add a – the important mobility element to their lineup, and then we’re delivering to them exactly what they need for their 4G networks, but also providing the added capability for a broad mobility into 3G markets as well and that seems to be appealing to their customers.

Todd Coupland – CIBC

Last question, you had a few sort of general questions around the M2M wins for 2011. Is there anyway for you to put a – I guess a quantification on how much business you think you won for 2011 or for the next two years, following 2011, have you decided whether or not you want to put something like that out in the marketplace?

Jason Cohenour

Well, we’re not ready to put that out in the marketplace just as yet. But if you believe – we believe that third-party industry analysts, they’re calling for a 35% CAGR on volume that probably translates into about a 25% CAGR on revenue, and we would certainly expect to grow at least in line with market, and we would expect to leverage the strength of our leading position in this space to take more than our fair share of the market growth.

Todd Coupland – CIBC

Okay, that’s great. Thanks very much.

Jason Cohenour

You bet.

Operator

Your next question comes from Gus Papageorgiou with Scotia Capital. Your line is now open.

Gus Papageorgiou – Scotia Capital

All right, thanks. Just a question on the open [inaudible], can you tell us – just a little bit of color on how important the Mobile Hotspot product was in the quarter and in the sequential sales gains? And then, kind of, maybe talk a little bit about it – there’s going to be – a lot of smartphones are going to be building in this capability or that becomes kind of Wi-Fi Mobile Hotspots, have you – just any kind of initial symptom what that’s doing demand for on-demand for these products or do you think – you think people are not going to really associate buying a smartphone with this kind of mobile Wi-Fi capabilities?

Jason Cohenour

Well, so, commenting on your first question, how is demand for Mobile Hotspots? Very strong. It’s too strong for us to meet all of it, so that was one of the products we were bit – a bit constrained on. And end market demand seems to be very strong and that’s primarily driven by Sprint and affiliates of course. So demand seems strong, we’re trying to catch-up on supply to meet that demand curve.

And how do we expect data specific, if you will, hotspot specific products to compete against smartphones that also layer in Hotspot capability. Well, I think we’re leaving it through right now, right? Sprint has launched the EVO, it’s been in the market now for a number of months, and we still can’t ship them enough overdrives. So I think they’re going to – my call is they’re going to coexist in the marketplace just fine.

Just like mobile phones that you could have always tethered to your laptop and AirCards have coexisted in the market just fine. I think there is plenty of demand out there for a number of a different device solutions. The hotspot specific devices like we provide, my view is, they’re going to continue to experience a strong demand.

Gus Papageorgiou – Scotia Capital

And just I’m following up on that Jason, do you think the demand is driven because of the 4G? Do you think there the 3G versions of these products are not experiencing a strong demand or you think it’s like Sprint’s 4G effort that’s really kind of driving the demand for these products?

Jason Cohenour

Well, that’s what we have clear visibility too, right? Because our only Mobile Hotspot has 4G and I do think it makes a difference. We’ve seen in any every generation of our AirCard products as we step-up the speed ladder that the total addressable market expands and the – type and number of applications that end users can use expanse as well, so the device becomes effectively more valuable. So I do think high-speed capability in 4G markets is definitely a demand driver.

Gus Papageorgiou – Scotia Capital

Okay, thanks a lot.

Jason Cohenour

Sure.

Operator

There are no further questions at this time. I’ll now turn the call back over for any closing remarks.

Jason Cohenour

That’s great. Thanks very much Steve. Well, once again, I’d like to thank everybody for joining the call today. And as usual, management will be available here in our office in Vancouver, should you have additional questions. Thank you very much, and Steve, we can end the call now.

Dave McLennan

Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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