Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Jason Cohenour – President and CEO

Dave McLennan – Chief Financial Officer

Analysts

Matt Ramsey – Canaccord Genuity

Amir Rozwadowski – Barclays Capital

Paul Coster – JP Morgan

Chris Umiastowski – TD Newcrest

Sera Kim – GMP Securities

Mike Abramsky – RBC Capital Markets

Todd Coupland – CIBS

James Moore – Morgan Joseph

Sierra Wireless Inc. (SWIR) Q3 2010 Earnings Call November 3, 2010 5:30 PM ET

Operator

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

Jason Cohenour

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

Today’s agenda is as follows. I’ll first provide a general business update and then turn the call over to Dave who will cover third quarter financial performance, as well as, guidance for the fourth quarter. I will then return for some brief summary comments and questions-and-answers.

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 currently being displayed on the webcast on slide number two. And I’ll now pause for a moment for everyone to read it.

This presentation should 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 summary of third quarter highlights. Overall, I’m very pleased to announce that our business generated great results in the third quarter. Revenue in the quarter was $172.7 million, up 27% year-over-year and up 9% sequentially, and represented another record revenue quarter for the company. Our year-over-year revenue growth was broad-based with both M2M and mobile computing business lines delivering strong year-over-year gains.

Non-GAAP operating expenses were down again to $41.3 million as a result of continued focus on cost management. Together, our strong topline and lower costs resulted in higher than expected non-GAAP earnings of $0.21 per share in the third quarter, significantly above our guidance range of $0.15 to $0.17.

In M2M, our strategic investments over the past four years are paying off. We’ve achieved the number one market share position globally, we’re delivering new differentiated products and securing new design wins in key segments. And we’re also delivering on our promise to expand our position in the M2M value chain and to become a permanent M2M solutions and services player. In mobile commuting, we’re well-positioned to continue capturing 4G growth. We have strong channel positions, robust product portfolio on pipeline and important new design wins.

Finally, in Q3, we announced new business unit based organization structure designed to sharpen focus on customers and further accelerate profitable growth.

Looking at our M2M business results in more detail, which as a reminder includes, revenue from sales of our AirPrime embedded modules to M2M customers, sales of our AirLink Intelligent Gateways and revenue from our AirVantage Services Platform.

In Q3 M2M revenue was $76.1 million, representing 42% year-over-year growth. With this growth, we solidly hold the number one global market share position in M2M and we continue to build on that leadership in Q3. We were awarded multiple OEM design wins in the quarter, including large opportunities with key customers in the automotive, payment, networking, energy and consumer segments.

We launched the AR Series a new line of wireless modules, specifically designed for automotive applications, including telematics, infotainment and navigation. Developed from the ground up to the automotive grade, the AR Series meets rigorous automotive quality and reliability requirements, and includes broad support for 2G and 3G air interfaces. There is no other product line like it in the industry. And we just established a new standard for the market. Customer reception of the AR Series has been excellent and we have secured multiple design wins for the product line.

We had another record revenue quarter for our high margin AirLink M2M Intelligent Gateways and Routers, including growing sales in Europe and Asia. While winning more AirLink business we also stepped up our end-to-end solutions activity integrating and bundling AirLink Gateways with our AirVantage Solutions and Services Platform.

On the subject of AirVantage, we announced that TELUS here in Canada has selected our AirVantage Services Platform to help them provision, manage and deploy M2M solutions on their network. This win is a significant milestone for our solutions and services business, as it provides an important demonstration of the readiness of our M2M software as a service platform to support millions of connected devices.

Looking forward to the fourth quarter, we expect our M2M business to grow sequentially from the third quarter, driven by broad-based strength across our M2M segments and customers.

I will now move to our mobile computing business, which includes revenue from sales of our AirCard Mobile Broadband Devices, as well as revenue from sales of our AirPrime embedded modules to PC OEM’s. We had an exceptional quarter in mobile computing.

Our mobile computing revenue in the third quarter was $96.6 million, up 18% year-over-year. Our growth was driven by continued strong demand for our dual-mode EV-DO WiMAX products, including the overdrive Mobile Hotspot, as well as the AirCard 250U, which was launched by late in Q2 by Sprint and CLEAR. We also saw strong revenue contribution and significant new product launch activity in our HSPA plus product lines.

Overall, we believe we are well-positioned to capture the mobile broadband opportunity, driven by continued strong channel positions at key carriers, recent new product launches, a strong product pipeline and new PC OEM design wins.

In the last few months alone, we launched a new device with AT&T, called Shockwave, the successor to the highly successful lightning product. Supporting speeds of up to 21 megabits per second on HSPA plus networks, Shockwave is the highest performing device in the AT&T product portfolio and is now being promoted in all channels.

We also commenced volume shipments of the world’s first commercial 42 megabits per second dual carrier HSPA plus device to Telstra. Telstra has now done a full commercial launch of the product in all channels where it is receiving significant promotional support.

We also announced our first LTE products, a series of embedded modules covering all LTE technology and banding combinations globally. We have also secured our first design wins with these products with both PC OEM’s and M2M customers.

Looking forward, we see continued profitable opportunities in mobile computing. We have been awarded new channel slots for yet to be launched 4G devices at key operator partners and we now have design wins with three Tier 1 PC OEM’s. We expect these channel awards and design wins to contribute significantly to our 2011 results.

Shorter term, we expect to see a slight sequential decline in our AirCard sales in Q4. While we still believe sell-through and channel positions remain strong, we recently experienced an unexpectedly high degree of focus on year-end inventory and cash management with one of our larger AirCard customers. As a result, we now expect AirCard sales in Q4 to be lower than previously thought.

With that, I’m going to pass it to Dave to cover Q3 results and Q4 guidance.

Dave McLennan

Thanks, Jason, and good afternoon, everyone. We 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, foreign exchange gains or losses, tax adjustments and non-controlling interest related to non-GAAP financial adjustments.

Q3 was a very strong quarter for us, with record revenue of $172.7 million, representing an increase of 27% over Q3 2009, and up 9% compared to Q2, 2010. As Jason stated earlier in the call, mobile computing contributed $96.6 million in Q3, that’s up 18% from Q3 2009, and up 27% sequentially from Q2.

Machine-to-machine contributed $76.1 million in Q3, that’s up 42% from Q3 2009, and down 9% on a sequential basis from Q2. This sequential decline was expected reflecting lower consumer product module sales.

We continue to benefit from the diversification of our business with our revenue being up -- being nicely balanced between mobile computing which contributed 50% -- 56% of our revenue in Q3 and M2M, which contributed 44%.

Another benefit of our diversification is reduced customer concentration. During the third quarter of 2010 our top two customers being Sprint and CLEAR contributed 31% of our revenue, compared to a year earlier when our two top customers contributed 43% of our revenue.

Moving onto our operating performance, starting with gross margin, non-GAAP gross margin was 28.4% in the third quarter of 2010, compared to 35.9% in Q3 ‘09, and 29% in Q2, ‘10. This sequential decline from Q2 ‘10 in gross margin was expected and was driven primarily by a higher mix of AirCard sales in the quarter.

With respect to operating expenses, we continue to manage our cost carefully as evidenced by restructuring announcement in September affecting approximately 6% of our staff and which will be largely complete by the end of this year.

Non-GAAP OpEx in the third quarter was $41.3 million, that’s down from $43.6 million a year earlier and down sequentially from the $41.7 million we incurred in Q2. Non-GAAP OpEx excludes $3.4 million of purchase price amortization, primarily from the Wavecom acquisition, integration cost of $700,000, stock compensation of $1.5 million and restructuring cost associated with our September reorg announcement of $4.3 billion, which includes 500,000 stock comp.

Higher revenue combined with operating expense discipline has improved our profitability. Non-GAAP earnings from operations during the third quarter was $7.8 million, up from $5.1 million a year earlier, a 53% increase and up sequentially from $4.7 million in Q2, and similarly, non-GAAP earnings per share increased to $0.21 from $0.18 a year earlier and was also up sequentially from $0.14 in Q2.

Turning to the balance sheet, our financial capacity remains strong. We ended the quarter with $105 million in cash and short-term investments, that’s equivalent to approximately $3.38 per share and the company is debt free. As we grow our business we are consuming some cash.

During Q3 cash flow from operations utilized $10.7 million, primarily the result of working capital requirements as we carried a higher level of receivables at the end of the quarter and the use of balance sheet to build inventory of components, which is in tight supply to protect our supply chain. We also used $2.8 million of cash in the quarter to fund capital expenditures, mainly for development tools and test equipment.

Summarizing the quarter, this slide presents key GAAP and non-GAAP financial metrics, compared to our guidance. Revenue at $172.7 million was at the high-end of the guidance range, gross margin at 28.4% on non-GAAP basis, was slightly better than our expectations.

On a GAAP basis, loss from operations was $2.2 million and on a non-GAAP basis we had earnings from operations of $7.8 million, which was better than our guidance range of $5.4 to $6.4 million and which resulted in an operating margin of 4.5%.

With respect to net earnings, our GAAP net earnings were $700,000 or $0.02 per share, which includes a foreign exchange gain of $2.4 million and an income tax recovery of $0.5 million. On a non-GAAP basis, net earnings were $6.5 million or $0.21 per share, well above our guidance range of $4.5 to $5.4 million or $0.15 to $0.17 per share.

The non-GAAP net earnings exclude the FX gain of $2.4 million and non-GAAP income tax was $1.3 million, which excludes $1.4 million of income tax adjustments. Please note a complete reconciliation of GAAP and non-GAAP results is available in the Investor Information section of our website.

So overall, we are very pleased with these results, which exceeded our expectations and which show solid year-over-year and sequential improvement.

Moving on to guidance for the fourth quarter of 2010, we are providing guidance on a non-GAAP basis, which as previously stated, excludes stock-based compensation expense, acquisition, amortization, Wavecom integration costs, restructuring costs, foreign exchange gains or losses, tax adjustments and non-controlling interest related to non-GAAP adjustments.

In the fourth quarter of 2010 we expect revenue to be between $170 and $175 million. Non-GAAP earnings from operations are expected to be between $8 and $9 million, and non-GAAP net earnings are expected to be between $6.8 and $7.6 million or $0.22 to $0.24 per share.

Relative to the third quarter, the company expects sequential growth in the machine-to-machine revenue as a result of broad based demand and sequential decline in Mobile Computing revenue as a result of lower AirCard sales.

We expect gross margin percentage to increase in Q4 to approximately 29%, as a result of the anticipated sales mix change and an expected reduction in product costs for some of our AirCard products. We anticipate that OpEx will be slightly higher in Q4, driven by new product certification and launch costs, as well as FX impact as the euro and Canadian dollar have strengthened against the U.S. dollars, the net result of which was an expected modest increase in net earnings, compared to the third quarter.

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

Now, I’d like to turn the call back to Jason for some closing comments.

Jason Cohenour

Thanks, Dave. So to summarize, Q3 of 2010 was an excellent quarter, featuring record revenue and better than expected earnings. Our Mobile Computing business delivered a great comeback and strong year-over-year growth, achieving its highest revenue level since 2008. Despite a softer outlook for Q4, we are bullish on our Mobile Computing prospects for 2011, and believe that we are well-positioned for profitable growth with continued strong channel positions, and excellent 4G product pipeline and design wins with leading PC OEMs.

In M2M, we have achieved global market share leadership in this rapidly emerging space and we are continuing to build on our success. Our M2M franchise is not only the biggest and continuing to grow, it’s also fundamentally differentiated from our competition on many dimensions. In addition to having the industry’s broadest product line and strongest global footprint, we are also now delivering on our promise to take more of the value chain, with important solutions and services wins with partner like TELUS.

Looking forward, we expect to leverage our leadership position and market advantages to continue to drive profitable M2M growth in Q4 of this year in 2011 and beyond.

Overall, we continue to be excited about our business, our market position and the opportunities that lay ahead. We are confident that we have the right team, the right structure and a strong business platform to leverage as we continue to drive growth and improving profitability.

So with that, Crissy will open up the line for some questions.

Question-and-Answer Session

Operator

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

Matt Ramsey – Canaccord Genuity

Good afternoon. Thanks for taking the questions. This is Matt Ramsey on for Mike.

Jason Cohenour

Hi, Matt.

Dave McLennan

Hi, Matt.

Matt Ramsey – Canaccord Genuity

Hi. First of all, Jason can you give a little bit more detail and color on your position in the M2M market, which segments in particular give you the best visibility currently, is it consumer products like the Nook? Is it networking with all your recent announcements? Are there longer term contracts or combination of multiple programs? We’re just trying to get a better understanding of which segment of your broad portfolio should drive 2011 growth and how this could impact margins?

Jason Cohenour

Well, I’d have to say that’s quite broad based Matt. We are pretty pleased that our M2M, recent M2M wins have covered a number of our segments and I rattled off a bunch of them during the con call. Now with respect to automotive in particular, those tend to be very long sales cycle, long integration cycles and long product cycles. So, if you look out several years, it’s probably the segment where we have the best visibility and having won the design wins that we have to date, our view is in three years, we’ve got pretty much all the design wins we need to put together a very nicely growing automotive business and obviously we expect to add to those design wins.

In consumer, we are doing well. We’ve -- as you know we’ve continued to sell through to Barnes & Noble for the Nook product. I am pleased to say that we now expect to have continuity with Nook and its successor products at least through 2011 and in addition to that we’ve won a couple of other new consumer devices that we think we’ll be launching in 2011.

So it is quite broad based. On the networking side, good things there and we see demand for high speed air links, HSPA Plus and LTE in particular. And we’ve secured some new design wins there for new air and interface technologies which we expect to launch soon with those networking partners.

So, the takeaway there is a highly diversified customer base in machine to machine, and I think we’re loading up pretty nicely on design wins.

Matt Ramsey – Canaccord Genuity

Great. Thanks for the additional color. Another question is with Sprint CEO just indicating really strong overdrive sales due comparing with the iPad, can you update us on your business trends with Sprint and maybe your future position with them? Do you anticipate increasing business with Sprint?

Jason Cohenour

Well, we had a very strong quarter with Sprint, and our expectation looking in to the future is that we will continue to have strong business with Sprint. I will say we probably have an unnaturally high channel share at Sprint. I’d love to continue to keep channel share of not too far off of 100%, that’s probably unrealistic. But nonetheless as we look in to the future, I fully expect it will continue to have a very strong channel share position there.

Matt Ramsey – Canaccord Genuity

Great. Thank you for that. And now one question for Dave on the model with Wavecom integration complete and it seems like a good path to earnings in 2011, can you help what’s modeling your longer term pro forma tax rate, and also with LTE potentially driving improved mix of mobile computing, can you update us on potential impact growth in operating margin targets?

Dave McLennan

Starting with the tax rate, Matt, I would expect based op our profitability forecast that we would be around 20% for 2011 in terms of a tax rate to using your model. In terms of our target model for the business on a consolidated basis, we’re still very much focused on gross margin of 30% and operating margin of approximately 10%.

Matt Ramsey – Canaccord Genuity

Okay great. Thanks for that. And now one more quick question, if I could, for Jason on the earnings call last week, Novatel indicated a much stronger visibility into an embedded module sales with laptops, can you add a little bit more color on your earlier comments about LTE embedded modem connectivity, and what do you think that impact on your model would be going forward?

Jason Cohenour

Sure. So we have had design win success with laptop OEM’s. For the last couple of years we have been selling primarily to a core set of very good Tier 2 laptop OEM customers. As we have indicated in earlier calls, the ecosystem has shifted to our favor and the favor of players like Novatel such that we expect to be supplying Tier 1 laptop OEMs, starting in 2011 and that’s not limited to LTE. By the way it includes LTE, but it’s not limited to LTE. So, we have got a good roster of design wins with three Tier ones as I indicated. We expect those are going to be significant contributors to 2011. Now, if we are more successful there than we expect, that’s going to be a very good thing for operating margins. It will probably compress gross margins a little bit. So, we kind of have to see how mix shakes out there, but clearly it’s going to be a bigger factor in 2011 than it was in 2010.

Matt Ramsey – Canaccord Genuity

Great. Thanks guys for taking my questions. Have a great day.

Jason Cohenour

You bet.

Operator

Your next question comes from the line of Amir Rozwadowski from Barclays Capital. Your line is 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

Jason, I was wondering if we could focus a bit on some of the near-term challenges you highlighted with your Mobile Computing business. It seems you had highlighted inventory and cash management issues. Is that something that you expect to continue? Have you seen less support for your products at that carrier?

Jason Cohenour

We’ve -- it’s an unfortunate and frustrating situation, but our view is that that carrier demand is very strong for our products. But that particular carrier is very focused on other business dimensions in the short-term. And we are certainly hopeful and expecting that the near-term impediments will be removed, but we don’t know the timing of the removal of those impediments right now. And I want to be careful there out of respect for this particular customer.

Amir Rozwadowski – Barclays Capital

Sure, sure. Have you seen any changes in competitive environment, I know we’ve seen some newer entries in to the U.S. market, for example, and I’m wondering if that maybe playing a factor here?

Jason Cohenour

No, I think, I know what you are referring to, no. That’s not our view, Amir, and I am sure you are probably referring to the Huawei launch at AT&T. And our view there is, Shockwave the recently launch product there is going to do quite well. And our expectations on the sales of that product are actually for growth compared to the previous quarter. And it’s our view that Shockwave is the featured product in the AT&T portfolio and is getting a lot of promotional attention. So, pretty bullish on that product in general and bullish on our channel position, our relative channel position there.

Amir Rozwadowski – Barclays Capital

That’s very helpful, Jason. And then, I was wondering if you could talk us a bit more about how you see sort of a longer term trajectory of the Mobile Computing business. Obviously, you have seen some traction on the PC OEM side and notably some potential wins in 2011, but we seemed that -- see fluctuations of availability on the adapter side and I was just -- in how you are looking at the business, how are you sort of managing the business for either growth or how should we consider that?

Jason Cohenour

You know, our Mobile Computing business we are managing to on a very focused basis. So we’re focused on our core set of customers. We’re not doing, we’re not doing AirCards for all. And we’re focused on driving strong profitability out of that business Amir, it’s an important contributor to our capacity to drive our diversification and growth in other areas, such as M2M.

So we are managing that business for profitability, but we’re also managing it to take full advantage of the opportunities that our core set of operators are providing. So, very focused investment is the way I characterize it, and our plan is in those core operator channels to continue to invest in them and to continue to lead in those channels. And, if the products that are created as a result of those focused efforts are attractive to other operators and we see those opportunities as profitable, then we’ll pursue them but we’ll pursue them carefully.

And with respect to PC OEMs that’s a new opportunity or a returning opportunity. I guess that’s a better way to put it. So we are investing there and that’s a leveraged investment. So as we develop our 4G AirCards from a product standpoint it’s not a giant step to have embedded modules for 4G applications as well. And then the real effort there is sales integration and launch support. So, we are investing to that degree because we think that’s going to be a good contributor to overall operating margin in 2011.

Dave McLennan

This is Dave, I’d just like to add that because of our diversification efforts as well, we’re better able to absorb fluctuations in that part of our business because the other part of our business Machine-to-Machine just has different business metrics around it. So, yeah we have variability in one part, but I think we are better able to absorb that and just have better quality earnings and cash flow as a result.

Amir Rozwadowski – Barclays Capital

Thank you very much for the incremental color, gentlemen.

Jason Cohenour

You bet.

Operator

Your next question comes from the lane of Paul Coster for JP Morgan. Your line is open.

Paul Coster – JP Morgan

Yeah. Thank you for taking my questions. And quickly on the PC side, you said that the ecosystem seems to be favoring you now at Tier 1 level, can you just elaborate from that what exactly has changed there?

Jason Cohenour

Well, the big change there Paul has been a change in approach to the PC OEM industry by Qualcomm. In the previous couple of years, Qualcomm was a direct supplier, a more of a direct supplier into that space, not leaving a lot of room in the ecosystem for players like us.

And Qualcomm’s approach has now changed such that we are teaming with Qualcomm to go in -- to go get design wins with both Tier 2 and Tier 1 laptop OEMs as they back away from being a direct supplier and are enabling other ecosystem players like us to play the critical role and actually bringing the products to markets and bringing the OEMs to market.

Paul Coster – J.P. Morgan

Sounds encouraging. And then when you win this business, the Tier-1, is it on a product level, on a product line basis, on a regional level, is it exclusive or can it be dual sourced or all of the above?

Jason Cohenour

It’s really all of the above. It’s certainly not unusual to see dual sourcing. Some of our PC OEMs buy only from us but it’s certainly not unusual to be in a dual sourced situation. And often that is driven by specific geographical requirements as an example.

So where a LTE implementation is critical, we might be in a better position to win that business then some suppliers, but if its -- if HSPA Plus is okay in a certain market, then a cost leader like Ericsson might be in a better position. So very often those module and supplier selections are geographically driven.

Paul Coster – J.P. Morgan

Got it. Should we expect more restructuring expenses go in the fourth quarter and then into next year?

Jason Cohenour

We will have some additional restructuring expenses in the fourth quarter. And they would be related to the September announcement that we made. They will be much smaller than the 4.3 that we incurred in the third quarter.

Paul Coster – J.P. Morgan

And then should be done, we shouldn’t see anymore restructuring in 2011?

Jason Cohenour

That’s correct.

Paul Coster – J.P. Morgan

And then last question, you said that you are number one in the M2M market and some reason, second guess, I’m just wondering what your sources might be in making that claim and also whom you see as the sort of main competitors, was it very fragmented and difficult to identify?

Jason Cohenour

It’s actually -- with respect to the top few players, it’s pretty concentrated and top of the list is us and second is, in -- is Centurion. Centurion has since spinning off of Siemens has been privately owned company, but recently bought by Gemalto, a public company. And we got some pretty good financial data as a result of that transaction, Paul.

And its our own internal information on our own M2M business, which we report on publically combined with clarity from Gemalto, which is now public information on the Centurion’s revenue run rates. So based on that, it was a pretty easy conclusion to put ourselves on the number one spot.

Paul Coster – J.P. Morgan

All right. Thank you very much, indeed.

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, guys. Once you asked -- starting with you, Jason, the tablet market was something you alluded to in last conference call, where you were hoping to do secure design win and on this call, I noticed you mentioned new consumer products coming up for 2011. Is there any correlation there, what’s going on in the tablet market?

Jason Cohenour

Well, those two comments are not correlated, but with respect to Pad and tablet activity, yeah, we’re plugged into a number of opportunities and that looks like could be very exciting space. So we’re competing hard to get some design wins there. And I think we’re well positioned to secure some of them.

Chris Umiastowski – TD Newcrest

Okay. So nothing’s happened yet, is the take away? Right.

Jason Cohenour

I think -- yeah, I think with respect to the large opportunities on our radar, that’s correct. We don’t have any design wins to report.

Chris Umiastowski – TD Newcrest

Okay. And I guess along that, I don’t want to plan too far ahead here. But I do want to just think about that the tablet market is a lower ASP market than the laptop computer market. And I am just wondering if you think there is sustainable place for module vendors in the tablet market or do you think its going to be more like the smartphone segment, where you were in there for a little bit, but you knew it wasn’t sustainable?

Jason Cohenour

I think that’s an excellent question. And I -- quite candidly that’s we -- the ecosystems kind of have to play out here for us. I think given the -- given some of the requirements that we’re seeing, in particular for Leading-Edge air-interface technologies, that puts players like us in a pretty strong position and in fact that ends up being a key product requirements.

But, yeah, longer terms, as you said, there were lower ASP devices and does that result in the -- in an ecosystems squeeze where a module play is not the preferred approach. Maybe -- and we just have to see. I think the opportunities that we see now look pretty attractive. We’re going to pursue them.

And we’re going to focus on building our position there and keeping our position. Then the ecosystem determines over the course of years that its not a module play. It’s a design on the board play then we will step away and stop investing. So we are being pretty practical about it.

Chris Umiastowski – TD Newcrest

Okay. That make sense since it sound very reasonable. The other question I want to ask you was about the laptop OEM wins. I think last quarter it was two Tier 1 wins, now you are saying three. So is that correct, there was incremental up by one in the quarter?

Jason Cohenour

That’s correct.

Chris Umiastowski – TD Newcrest

Okay. And just to make sure definitions are clear to people. When you say Tier 1 wins, how many Tier 1 players out there, do you consider there to be?

Jason Cohenour

There -- I consider there to be five or six.

Chris Umiastowski – TD Newcrest

Okay. So that’s -- okay. That helps a lot. I appreciate that. And then so what kind of volume shipment estimates, do you think might be reasonable in 2011 in the notebook space for those -- from these three new customers?

Jason Cohenour

Well, I am going to be careful with that one, Chris, because it’s looking out pretty, pretty far. I think -- maybe just talking about timing, I think that these are -- I think we will see first half launches as a result of some of these wins. But our view is in terms of more substantial revenue contribution, it’s probably in the back half of year. And with respect of volumes, I mean the only data point, I will give you is, when we were fully in the embedded module business for PC OEMs in 2008. We hit a revenue run rate of 25 million a quarter.

So some factors have changed. ASPs are probably down a little bit, volume might be up a little bit. So when we were competing effectively in that business in 2008, it was $100 million run rate business. So could it be $100 million run rate business again? Maybe. I mean it’s certainly not a crazy idea.

Chris Umiastowski – TD Newcrest

Yeah. So obviously volumes would be up, prices would down and those might have balanced each other.

Jason Cohenour

Exactly.

Chris Umiastowski – TD Newcrest

Okay. That’s really help in terms of how to think about it. Last question, just a AirCard question, I think I always ask you about this business. And I will ask maybe slightly different version of it this time. It just seems to me that there are big players like Huawei out there and they are winning business all over the world.

And they don’t have high-end products as you do clearly but if that trend continues, my worry and I’m wondering if it resonates at all with you, how long can Sierra Wireless continue to just focus on its core set of carrier customers until the volume advantage from some of its competitors is just overwhelming.

Jason Cohenour

Yeah. That’s a fair question. We obviously that’s been investor overhang probably in our business too. So we -- couple of things about the AirCard business. First of all, in the core customers we have, they actually really value the stuff that we bring. Right. High performance, first to AirLink, high quality, high reliability, great channel support, they value that. And they tell us that everyday.

So we’re going to -- we think it’s a fairly safe bet to continue to invest in that core set of customers. Now, will we be, will we have unsustainable Huawei as an example, have an unsustainable scale advantage against us. You know, don’t forget we have also got an M2M business that’s producing in to the millions of units.

So we’re not going to match Huawei’s cost of goods but our business in totality is driving 10 million units a year and that is not -- that’s not low volume and that does give a player like us significant scale when we go to procure parts and cut deals with our contract manufacturers. So I think the gap between us and the big Chinese players is on pure manufactured product cost is probably not as big as you think.

Now, there maybe some irrational pricing and business models with some of those players that exacerbates that situation but that’s crazy economics. Over time you like to think that just doesn’t work even for a business like Huawei. So we are going to be careful, Chris. Our investments are focused and because players like Huawei have done what they’ve done in markets like Europe.

We’re lasering in where our investments should go. And like I said earlier, we’re not going AirCard for all, because if we made proactive investments in markets where we know it’s not a favorable competitive situation that would be a bad investment. We think it’s a good investment to make in our core customers plus don’t forget the AirCard business feeds our M2M business quite nicely with respect to leading edge AirLink technology modules.

Chris Umiastowski – TD Newcrest

Okay. That makes perfect sense. I appreciate all the details Jason, that was really helpful.

Jason Cohenour

Sure.

Operator

Your next question comes from the line of Sera Kim, GMP Securities. Your line is open.

Sera Kim – GMP Securities

Hi. Good evening. I was wondering, did Q3 include some initial channel field for the Shockwave product? And just wondering, if Q4 will reflect to continue ramp. I just want to get a sense on if there was leader in the quarter ship or at the happened throughout the Q3 or middle into the end of Q3?

Jason Cohenour

Shockwave, if there was contributor was a small contributor in Q3.

Sera Kim – GMP Securities

Okay.

Jason Cohenour

And we expect it to be more significant contributor in Q4.

Sera Kim – GMP Securities

Okay. Great. Thanks. And then in terms of -- how many 10% customers did you have in the quarter?

Dave McLennan

Sera, it’s Dave. We had two customers, two 10% customers.

Sera Kim – GMP Securities

Okay. So clear where is that 10% customer then?

Dave McLennan

Yeah.

Sera Kim – GMP Securities

Okay.

Dave McLennan

And clear we’re two 10% customers.

Sera Kim – GMP Securities

Okay.

Dave McLennan

It’s almost to about 31% of sales.

Sera Kim – GMP Securities

Okay. Great. And just also wondering if you can provide an update on the component supply situation. Did that impact any -- the guidance for Q4 at all or was it just purely because of the cash management and inventory? You should ...

Jason Cohenour

I would really point -- I really point to the latter factors primarily. I mean you can probably drive indirect connections between supply constraints early in Q3 and a less than stellar demand picture in Q4. But really the main factor there is as I stated earlier, its inventory and cash management from one of our larger AirCard customers. Supply has improved. It was tough.

So in general on supply, supply was tough in the beginning of Q3, supply was stronger by the end of Q3, memory in particular has gotten a bit better. Although we’re still fighting fire drills on a daily basis across a broad range of components ranging from PCBs to tower management to flash deck. So we’re not completely through the supply change constraints, although the key one memory which was our -- had been our nemesis for several quarters seems to have normalized.

Sera Kim – GMP Securities

Okay. Great. And then in terms you earlier you talked about long sales cycle centre, long product cycles for the automotive market in the M2M business. What if I vote some of the other ones, I mean I would imagine that the consumers side is a little bit quicker on that front and is quicker to ramp up, but some of the other verticals that you guys play in. Can you just talk how quickly it takes or how long it takes to get the design wins to ramp out and how it varies from vertical to vertical?

Jason Cohenour

Yeah. That would be a long conversation…

Sera Kim – GMP Securities

Okay

Jason Cohenour

…because we focused on about 10 verticals, but you are right in your assumption that it does vary between those segments. So automotive is probably on the extreme side in terms of length of sales cycle integration cycle and product cycle. I mean by the time you get a design win with an automotive player, it’s probably two years before the product gets launched. And then that product is probably in market for four or five years.

Conversely, consumer is the other end of the spectrum and you’re right. Those product cycles can be -- those product cycles are -- integration can be less than a year so short is nine months and then product cycles can be significantly shorter like a year.

So those are -- and they tend to be high volume quick to ramp and then onto the next new generation a year later. And that’s why winning continuity with the player like Barnes and Noble is pretty key because they drive some nice volume and we have been able to maintain continuity there now for a couple of generations of nook.

Sera Kim – GMP Securities

So is every vertical different? I guess, just when you talk about broad based demand and a number of different design wins across all your different segments, how do I know what will be reflected in 2011 and which will be reflected more into 2014?

Jason Cohenour

That’s a good question. I think when we speak about demand, we are really speaking about visibility to revenue. When we speak about design wins, we are really speaking about revenue that will happen at some point in the future.

Now, the challenge on those design wins and trying to time them, we will work on giving some better visibility there, because I think it’s an excellent point quite candidly and trying to lay that out over what design wins mean in each segment and how they layer on top of each other over time. But as you can appreciate very diverse customer base, lots of segment and it’s tough to do that without doing a lot of upfront work.

Sera Kim – GMP Securities

Okay. Great. Thanks a lot.

Jason Cohenour

Sure.

Operator

Your next question comes from the line of Mike Abramsky, RBC Capital Markets. Your line is open.

Mike Abramsky – RBC Capital Markets

Yeah. Thanks very much. Do you expect that you will still see in your transition, M2M over time that AirCards will become flat revenue business given declining ASP’s versus higher volumes and M2M will become your growth engine? How do you think that will start to see visibility to that and timing to that?

Jason Cohenour

Well, yeah, we do think about AirCard as AirCard and mobile computing as a slower growth business because of the focused approach we are taking to the market. And we do look at M2M as more of a higher growth business over time.

So I think you characterize that pretty accurately. So slow growth and higher growth. And how that mix plays out over time is still kind of early to tell, but you know M2M is -- depending on the strength of the mobile computing business from quarter-to-quarter, M2M is already close to 50% of our business so my expectation is that over time it will be a -- large represent a larger and larger percentage of the overall mix.

Mike Abramsky – RBC Capital Markets

So does that kind of 50% become 75% in a year? Is that the way we should kind of think about it.

Dave McLennan

Yeah. No. I don’t think it’s going to happen that fast. It’s not going to happen that fast, Mike.

Mike Abramsky – RBC Capital Markets

Okay. But does the rising mix of M2M suggest higher gross margins or will there be a mix of consumer M2M like Nook at lower gross margins? How does that flow in to the shift, the gross margin impact?

Dave McLennan

Generally speaking, it should have a favorable mix impact to gross margin percentage.

Mike Abramsky – RBC Capital Markets

And why is that?

Dave McLennan

Well it’s because it’s a fundamentally higher gross margin business.

Mike Abramsky – RBC Capital Markets

Okay. So you are not expecting some dilution from consumer M2M to gross margins?

Dave McLennan

That’s a factor. But it still results in a higher gross margin percentage.

Mike Abramsky – RBC Capital Markets

Than air cards is what you are saying.

Dave McLennan

Yeah. Then, mobile computing.

Mike Abramsky – RBC Capital Markets

Okay. I understand. And regarding PC OEM’s -- can you give us a little more color on the number of platform devices, the wins involved with. Is the form factor traditional laptops or I know you got certainly some questions about this, but any more color you can give us on that?

Dave McLennan

Well, in terms of number of platforms, we don’t have that data yet because we are a little too early as compared to product launch. But our expectation is going to be multiple platforms with each of these OEMs and mainly traditional laptop platforms by the way, across a number of different classes of platforms, ranging from consumer to enterprise.

We also expect there to be some netbooks mixed in as well. But with respect to the PC OEM design wins that we have referred to none of those to my knowledge or had design wins, those are different and new opportunities we continue to work.

Mike Abramsky – RBC Capital Markets

Does that appear to you broader than in ‘08 in terms of PC OEM now?

Dave McLennan

I think it could be, yeah, because in ‘08 it was a still kind of our early days for embedded 3G connectivity in laptops and now it’s gotten, it hasn’t fully covered the spectrum yet, but it certainly closer to the table stakes under the spectrum today than it was in 2008.

Mike Abramsky – RBC Capital Markets

Okay. And then the inventory adjustment not to beat a dead horse, but was this something that you thought might be going on for other vendors? Is there some change they took across the board or do you think it was restricted to yourself?

Dave McLennan

Again, I want to be careful there, but I think it was a decision to manage cash tightly and to sell what they had, whether it was from us or from others until such time as they don’t have to manage cash quite as tightly.

Mike Abramsky – RBC Capital Markets

And do you think that continue through the holiday?

Dave McLennan

Yeah. I think it will and that’s factored in to our guidance.

Mike Abramsky – RBC Capital Markets

Okay. I think. That’s it. That’s it. Thank you very much.

Dave McLennan

Sure.

Operator

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

Todd Coupland – CIBS

Yeah. Good evening, everyone. Just on the Q4 inventory adjustment. What -- how much below your expectations is this, if you could give us a ballpark on that?

Dave McLennan

It’s about $10 million.

Todd Coupland – CIBS

Okay. And the $10 million would be consistent with what you talked about, I guess, two or three months ago where good visibility in Q3 qualitatively felt good about Q4 and now this is a little bit of a rug move that wasn’t anticipated when you made those comments, I guess?

Dave McLennan

Correct.

Todd Coupland – CIBS

And would you say everything else is sorted as planned with the exception of this relative to that prior commentary.

Dave McLennan

I would, yeah, materially aligned with expectations, yeah.

Todd Coupland – CIBS

Okay. And then I think back then you would also talked about even visibility into Q1 and I got all the points about slower ramps on the PC, they got to get up and running, et cetera to have a impact later in 2011, but I think the comments when you talked about visibility also included less seasonality into Q1 and I’m just wondering what your thoughts are on that at this point.

Jason Cohenour

Well, so I think we just demonstrated if we get too far ahead of ourselves. We can make mistakes.

Todd Coupland – CIBS

Yeah.

Jason Cohenour

So I’m going to be careful on that and avoid the question.

Todd Coupland – CIBS

Okay. So that’s certainly fair I understand. Should we expect typical seasonality in 2011 including Q1, is there any reason why you shouldn’t see some rollover after the Christmas Holidays?

Jason Cohenour

Yeah. We will probably experience some seasonality impact. Again, quite early to tell, but I would expect it.

Todd Coupland – CIBS

Okay. Last question, so last year in Q4, the smartphone promotions sort of suck some oxygen out of the room with respect to some demand for your products, I know AT&T is promoting Shockwave and overdrive is doing well, et cetera?

What is your thinking this year? I mean because we certainly seen very hot smartphone numbers from the U.S. market and I’m just wondering if that is a potential risk again going into Q4 this year?

Jason Cohenour

Well, I don’t know if it’s a risk, it’s probably an impact, right? I mean, clearly, there is where promotional dollars are spent can have a pretty significant impact on our business. So, I think, our expectations for promotional activities are factored into our guidance and probably doesn’t include aggressive TV national ad campaigns.

Todd Coupland – CIBS

Okay. Like you had I guess summer of 2009.

Jason Cohenour

Right. Or earlier this year even.

Todd Coupland – CIBS

Or earlier this year as well.

Jason Cohenour

Yeah.

Todd Coupland – CIBS

Sorry, one more question if I could, when do you expect Nook 2 to start impact your business?

Jason Cohenour

Probably first half of next year.

Todd Coupland – CIBS

Okay. And what kind of expectation should we be having with all the Tablets that are coming out? Is there some rethinking going on along those lines in terms of how well this type of product can sell as the market crowds up a little bit.

Jason Cohenour

It’s a -- you mean Nook?

Todd Coupland – CIBS

Yeah.

Jason Cohenour

Yeah. Well, so a couple of factors there. We’ve, it’s -- don’t get me wrong, it’s very good business for us, but the revenue from Nook has come down more dramatically since Q1, right. So still continues to be a strong contributor but remember Nook was a 10% customer couple of quarters ago, right. So that’s definitely changed. And that’s driven by a couple of factors, one is I would say specific to the Nook. There is Wi-Fi versions and there is versions -- Wi-Fi only versions and versions this have both Wi-Fi and 3G.

So that was a new development over the course of the year. So certainly that has resulted in some cannibalization of the Wi-Fi, 3G device and then, the second factor that you’re alluding to is the popularity of pads and is that cannibalistic. Yeah, got it – I would imagine it’s got to be right.

So to what degree it’s impacting overall demand for the e-book category, I can’t -- it’s tough for me to comment on an exact percentage impact, but the impact is definitely there. And I think that’s factored into our current expectations with respect to Nook and other e-book readers.

Todd Coupland – CIBS

Right. Yeah. Clearly have your eyes open with all that out there now. So...

Jason Cohenour

Yeah. Definitely.

Todd Coupland – CIBS

Great. Thank you very much.

Jason Cohenour

Yeah. You’re welcome.

Operator

Your next question comes from the line of James Moore from Morgan Joseph Your line is open.

James Moore – Morgan Joseph

Hi, guys. Thanks for taking my call. This is Jim Moore (inaudible). Just quick question everything else has been pretty much answered. The cash and cash equivalence is kind of been creeping down slowly for last few quarters, just wondering when we can expect that to stabilize and do you guys have plans for your cash that you would like to share in the near-term?

Dave McLennan

One of the big, its Dave here, one of the big drivers of our cash consumption over the last several quarters has really been working capital requirements. Particularly, on the receivable side and the inventory side. I wouldn’t expect us to have the same sort of receivables dynamic that we had in Q3 for this quarter Q4. But, certainly, we’ll continue to use cash with some selective inventory purchases on components. So, I think for the next quarter or two you should expect some modest consumption of cash.

James Moore – Morgan Joseph

Okay. Thanks very much. Good luck.

Dave McLennan

Thank you. Operator, we’ll take one more question.

Operator

There are no further questions in queue at this time.

Dave McLennan

Okay. Well, thank you very much everybody for joining today’s call and as usual, management is available here in our Richmond, BC headquarters for follow-on questions should you have any. Thank you very much.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sierra Wireless CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts