Sierra Wireless Q4 2005 Earnings Conference Call Transcript (SWIR)

Feb. 4.06 | About: Sierra Wireless, (SWIR)

Sierra Wireless (NASDAQ:SWIR)

Q4 2005 Earnings Conference Call

January 26th 2006, 4:30 PM.

Executives:

Jason Cohenour, President and CEO

David McLennan, CFO

Analysts:

Amit Kapur, Piper Jaffray

Andrew Lee, TD Newcrest

John Bucher, Harris Nesbitt

Dev Bhangui, Haywood Securities

Amy Mann, JP Morgan Chase

Glenn Tracey, Pacific International Securities

Nick Augustino

Deepak Chopra, National Bank Financial

Jeff Kaval, Lehman Brothers

Operator

Thank you for holding for the Sierra Wireless Fourth Quarter Results Conference Call. During the presentation all participants will be in listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Thursday, January 26, 2006. I would like to introduce your speakers, Jason Cohenour and David McLennan, please go ahead.

Jason Cohenour, President and CEO

Thanks Vanessa. Good afternoon everyone and thanks for joining the call. I am Jason Cohenour, President and CEO of Sierra Wireless and with me is David McLennan, our CFO. Today, we are going to review our Q4 2005 results and provide guidance for Q1 2006. The agenda is as follows. Dave lost the coin toss and will read the forward-looking statements disclaimer. I will cover business highlights and our product update. Dave will cover Q4 financial performance and Q1 guidance. I will then sum up the call and open the line for questions. So on to Dave.

David McLennan, CFO

Thanks Jason and good afternoon everyone. This information contains forward-looking statements that are not promises or guarantees but are only predictions that relate to future events or our future performance or state other forward-looking information and are subject to substantial risks and uncertainties that could cause our actual results, performance, or achievements to differ materially from those expressed, anticipated, or implied by the forward-looking statements.

These forward-looking statements relates to among other things our revenue, earnings, and other financial guidance for the first quarter of fiscal 2006, plans, objective, and timing for the introductions or enhancements of our services and products. Statements concerning strategies, developments, statements about future market condition, supply conditions, channel, and then customer demand conditions projected or future revenues, gross margins, operating expenses, profits, and other statements of expectations, intentions, objectives and plan that are not statements of historical fact. When using this press release towards may, expect, believe, intend, anticipate, estimates, predicts, and similar expressions generally identify forward-looking statements. Forward-looking statements reflect our current expectations, the risks and uncertainties that may affect our actual results, performance or achievements on many and include among others our ability to develop, manufacture, supply, and market new products that we do not produce today and that may not gain commercial acceptance.

A reliance under deployment of next generation networks by major wireless operators and increased competition. These risks factors and others are discussed in our Annual Information Form, which maybe found on SEDAR and in other Regulatory Filings with the Security and Exchange Commission in the United States and the Provisional Securities Commissions in Canada. These factors should be reviewed carefully and you should not place undue reliance on any forward-looking statements, unless otherwise required by applicable securities loss, Sierra Wireless explains any intentional obligations, update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Over to you, Jason.

Jason Cohenour, President and CEO

Thanks Dave. The fourth quarter of 2005 represented our second consecutive quarter of strong business execution and improving financial metrics following the restructuring of our business in mid 2005. I believe we have a solid business recovery underway. During the fourth quarter we had three first-to-market product launches. Our HSDPA AirCard for the US, our AirCard 860 was the first of its kind launched in the US. Our second HSDPA card, our AirCard 850 was the first fully functional HSDPA PC card launched in Europe. We were also the first company to launch CDMA and EVDO, Mini Cards for laptop OEMs. We also grew sales by more than 37% over the third quarter; we had strong gross margins and achieved a modest profit and positive cash flow. Intense focus on our core PC card and embedded module businesses is driving this recovery and is strengthening our competitive position in both markets. Markets, which we believe had significant growth opportunities, and we are pleased with the progress we have made, we also recognized that a lot of hard work and continued strong execution is required before we achieve the goals we have set for ourselves in terms of product line strength, market position, and financial results.

Moving to business development, I will start with activities in our PC card and MC business. During Q4 we completed the development of our first HSDPA PC cards. The AirCard 860 for North America and the AirCard 850 for Europe and Asia. The AirCard 850 and 860 are fully functional HSDPA PC cards that are backward compatible with UMTS, EDGE, and GPRS out of the box. In Q4, we became the first company in the world to bring fully functional HSDPA PC cards to market. During Q4 we also had successful launches of our HSDPA PC cards in the US and Europe. We launched the AirCard 860 with Cingular Wireless in the US, while in Europe we launched the AirCard 850 with both Manx Telecom and O2 affiliate based in the UK and Sunrise in Switzerland. We are excited to have a substantially strengthened product lineup with which to compete effectively in Europe. We view our launch of the AirCard 850 as an important first step in what will be a long-term market share battle against established incumbents.

We also continued to make solid progress with our CDMA, EVDO PC card business with the launch of our AirCard 580 at TELUS Mobility in Canada. We had strong sales of the AirCard 580 once again in Q4 and continue to see solid sales of the product in Australia and New Zealand as well. With respect to new PC cards and MC products initiatives, we commenced the development of next generation EVDO and HSDPA PC cards. Our AirCard 595 will support EVDO (Rev A) capability while our AirCard 870 will support tri-band HSDPA capability and speeds of up to 3.6 Mbits/sec. We expect both products to be commercially available in the second half of 2006.

Additionally, we have projects underway to bring next generation versions of our rugged mobile or MC products to market. We expect to launch two next generation versions of the MC, one for EVDO and one for HSDPA later this year. I will now provide an update on our OEM business starting with activity and currently shipping products. With the announcements from several leading laptop manufacturers of their plans to embed 3G wireless wide area capability inside their laptops. The opportunity for sales of embedded modules has potentially increased significantly. We believe we are well positioned to capture a leading position in this market as a result of our extensive experience in embedding several generations of wide area wireless modules inside mobile computing platforms.

We have design wins with Lenovo and HP for our EVDO PCI Express Mini Card and commenced commercial shipments to Lenovo in the latter part of 2005. Our late September launch with Lenovo represented the first commercial deployment of an embedded 3G wireless minicard by any laptop manufacturer, making us and Lenovo first to market. Lenovo had subsequently announced the integration of our EVDO minicard into two additional business notebooks. In early January of this year, HP announced the availability of their first notebooks incorporating our EVDO minicard at the CES Show in Las Vegas. Our EVDO minicard has been certified for operation on both the Sprint and Verizon Networks.

Also during the fourth quarter we wrapped up shipments in North America of our EM5625 EVDO module to some of our longtime mobile computing OEM customers such as Panasonic. Panasonic has subsequently integrated our EM5625 module into three of its notebooks platforms. With respect to new OEM product initiatives, development of our first HSDPA minicard modules remains on track for launch in early 2006 and some laptop OEMs have commenced integration activities. As previously disclosed, we have a design win for HSDPA minicard with one of our existing laptop OEM customers. In addition to this win, we have secured another OEM design win for HSDPA minicards with a major laptop OEM focused principally on the European market. We expect to announce, which OEMs these design wins are with as our customers get closer to launch of their platforms. We have also commenced development of next generation EVDO and HSDPA minicard. Our EVDO minicard will support EVDO (Rev A) capability, while our HSDPA minicard will support tri-band HSDPA capability and speeds of up to 3.6 Mbits/sec. We expect both products to be commercially available in the second half of 2006.

Let me give some general comments about the state of our business. Our channels reported solid sales of our products in Q4. Bookings in Q4 were strong as they were in Q3 giving us good visibility to Q1 2006 revenue. Our inventory levels were down in Q4 relative to Q3 reflecting strong demand for our products. Demand for some of our products exceeded our supply capability during the quarter. We expect to build a stronger inventory position for products with strong demand as we move forward. Also during the quarter we witnessed continued aggressive deployment of high-speed 3G services by many of the world’s leading operators. We view this deployment coupled with the associated promotional activities related to high-speed data as an important catalyst for our business. We believe this trend will continue throughout 2006. Now, to Dave to review Q4 2005 results.

David McLennan, CFO

Thanks Jason. Before I review the results, I would just like to correct a typo in our press release, it’s on the income statement incorporated in the press release and specifically the sales and marketing number for the three months ended December 31st 2005 reads on this press release as $3,986,000, as the last two digits for that number were transposed and the actual number is $3,968,000. That does not affect any of the other totals or any other number on the income statement, the total OFEX, correctly factored in the correct sales and marketing, and it was simply a transposition of the numbers on the press release copy. So, I apologize for that, but it has no effect on our bottomline or total results.

Moving to those results, our results are reported in US dollars and are accordance with US GAAP. For the fourth quarter of 2005, our revenue was $37.6 million. Gross margin was $14.5 million or 38.6%. Operating expenses were $14.6 million and our net income was $900,000 or positive $0.04 per share. Our fourth quarter results included a number of non-recurring adjustments as follows. A favorable adjustment to gross margin of $1.2 million or representing 3.2% results from the finalization of an intellectual property royalty agreement, the cost of which have previously been accrued for at higher rates. Approximately $600,000 of write-downs in additional amortization cost of certain patents of licenses are also included in the results. An additional restructuring charge of approximately $300,000 primarily related to a change in estimate of our facilities restructuring, and finally a positive recovery of approximately $700,000 of insurance proceeds related to an ongoing legal proceeding.

Results for the fourth quarter of 2005 relative to guidance originally provided on October 27th 2005 and updated on January 4th 2006 were as follows. Fourth quarter revenue was $37.6 million inline with our updated guidance of approximately $37 million and better than our original guidance of approximately $32 million. Gross margin was 38.6% including nonrecurring items, which had a favorable impact at 3.2%. This was above our guidance of 33%. Operating expenses were 14.6 million higher that our guidance of 14 million, net income of $900,000 or positive $0.04 per share was better than our guidance of a net loss of $2.9 million or a loss of $0.12 a share.

Cash flow from operations was positive $3.4 million and free cash flow was $1.1 million, consistent with our updated guidance of positive cash flow and better than our original guidance of negative cash flow. Q4 2005 results when compared essentially to Q3 are as follows: revenue increased to $37.6 million from $27.5 million in Q3, an increase of 37%. Gross margin was 38.6% compared to 34.9% in Q3. Operating expenses were $14.6 million versus $14 million in Q3 and net income was positive at $900,000 or $0.04 per share versus a loss in Q3 of $3.1 million or minus $0.12 per share.

Some of the key drivers behind these numbers, during the quarter sales of EVDO, EDGE, and HSDPA PC cards in North America were stronger than expectations at the time of guidance. As well, we had approximately $1 million of sales of Voq sales, which we had previously written down. During the quarter, Cingular and Sprint each encountered for more than 10% of our revenue at an aggregate. These two customers represented approximately 42% of our revenue. Relative to Q3 EVDO and EDGE PC card sales were fairly consistent. The growth in revenue and primarily from sales of our new HSDPA PC card in North America and Europe as well as increasing OEMs sales.

In addition to the favorable IP royalty settlements, which positively impacted our gross margin during the quarter by $1.2 million or 3.2%, our gross margin was also favorably impacted by a greater mix of higher margin PC cards as well as higher volume. During the quarter, our operating expenditures of 14.6 million included some non-recurring items as follows: approximately $600,000 of write-downs in additional amortization cost of certain patents of licenses of which $500,000 is recorded in R&D and $100,000 is in amortization. In addition, restructuring charge of $300,000 primarily related to a change in estimate of our facilities restructuring and a positive recovery of approximately $700,000 from insurance proceeds related to an ongoing legal proceeding. This was booked in administration. Also for Q3 the growth in our operating expenses was primarily driven by additional sales and marketing expenses to support the launch of new products.

Looking at the balance sheet, compared to September 30th our cash short and long-term investment increased by $1.9 million dollars to $104.1 million at the end of the year. This increase in cash reflects the improvement in our operations made strong quarter for accounts receivable collection. Inventory levels declined during the quarter from $4.2 million to $3.3 million reflecting continued strong product demand.

Looking at our revenue on a segmented basis, firstly revenue by product line Q4 compared to Q3. In Q4 PC cards represented 68% of our revenue or $25.5 million versus 71% or $19.4 million in Q3. OEM was 17% or $6.5 million versus 11% or $3.1 million. Our MC product line was 9% or $3.4 million versus 12% or $3.2 million. Other revenue was 6% in Q4, the same as 6% in Q3. The growth in our core PC card and OEM businesses reflect the positive impact of new product launches during Q4.

Moving to revenue by distribution channel, again Q4 versus Q3, revenue through the career channels in Q4 was 51% versus 52% in Q3. Resellers was 31% versus 34%. OEMs were 18% versus 13%. On a technology basis, revenue from GSM based product including EDGE and HSDPA in Q4 were 47% or $17.6 million versus 31% or $8.5 million in Q3. CDMA was 50% or $18.8 million versus 65% or $17.8 million and other was 3% in Q4 versus 4% in Q3.

During the fourth quarter initial sales in HSDPA with our AirCard 860 and 850 added significantly to our GSM based business, and we experienced modest growth in our overall CDMA business driven by increased sales of our EVDO embedded modules. Revenue from new products introduced in the last 24 months is as follows: Q4 was 78% and Q3 was 66% as a comparison.

Revenue by geography, in the Americas we saw 74% of our revenue or $27.6 million in Q4 versus 75% or $20.7 million in Q3. EMEA was 14% or $5.4 million versus 6% or $1.6 million, and Asia Pacific was 12% or $4.6 million versus 19% or $5.1 million. Revenue in the Americas was up significantly in the fourth quarter as compared to Q3 driven mainly by sales of our newly launched HSDPA PC card and shipments of new embedded module products. Europe also benefited from sales of our newly launched HSDPA PC cards together with increased sales of EDGE PC cards. Asia Pacific sales declined modestly. Overall, we expect product, channels, technology, and geographic segment percentages to fluctuate quarter by quarter based on mix and new product introductions.

Moving to guidance for the first quarter of 2006, we are providing guidance, which reflects our current business indicators and expectations for this period. Inherent in this guidance are risk factors that are described in detail in our regulatory filings. Our actual results could differ materially from the guidance presented. Our guidance for the quarter include the higher than usual contribution from recently launched and soon-to-be launched products. There are uncertainties associated with the launch and early ramp of new products that could affect our ability to achieve guidance. All figures or estimates based on management’s current beliefs and assumptions and are subject to change.

We expect Q1 to show sequential revenue growth over the fourth quarter of 2005. Accordingly, we are providing record financial guidance for Q1 2006 as follows, revenues of approximately $40 million. Gross margins of 33.5%, operating expenses before stock option expense of $13.7 million. Stock option expense of $1 million resulting in operating expenses including stock option expense of $14.7 million. This results in a net loss including stock option expense of $800,000 or minus $0.03 per share. Excluding stock option expense net income is expected to be approximately breakeven to slightly positive.

We expect cash flow from operations to be negative during the quarter, and this expectation of negative cash flow reflects the impact of a significant payment during Q1 associated with royalties for past sales as a result of the royalty agreement referenced earlier and a plan to increase in inventory for selected products. With that I would like to turn it over to Jason to sum up.

Jason Cohenour, President and CEO

Thanks Dave. During the fourth quarter of 2005, we saw continued improvement in the financial metrics of our business and continued strong execution on new product introductions. Revenue for the fourth quarter was up 37% compared to the third quarter driven by strong sales of our PC cards and new embedded modules. Gross margin was strong on the quarter assisted by a non-recurring royalty adjustment to cogs and we managed operating expenses effectively. These factors contributed to a positive net income result and strong cash flow from operations. We completed the development of our HSDPA PC cards on-schedule and commenced commercial shipments to Cingular in the US and to European customers as well making us the first company in the world to bring fully functional HSDPA PC cards to market. We have strong execution in our OEM business as well. We were the first company in the world to bring EVDO minicard modules to market with major laptop OEMs. We saw multiple EVDO enabled product platform launches from our laptop OEM customers including Lenovo, HP, and Panasonic, leading our competitors to this key industry milestone by a wide margin.

We believe that we have captured an early leadership position in a strategic and potentially high growth market. Building on our success in EVDO embedded modules, we have now secured two-design wins with major laptop OEMs for our HSDPA minicard embedded solutions. We view these wins as critical to our OEM strategy and to strengthening our position in Europe. Development of our next generation products for both EVDO and HSDPA is well underway and on-track for launch in the second half of 2006. Our R&D execution on these programs continues to be strong. Our focus for 2006 is to continue to execute on our new product pipeline and the business development activities related to bringing these new products to market.

While we are pleased with the progress we have made, we also recognize that a lot of hard work and continued strong execution is required before we achieve the goals we have set for ourselves in terms of product line strength, market position, and financial results. We continue to tightly manage our operating expenses while being careful not to put key programs at risk, as we expect these programs to provide the foundation for continued growth and a return to sustained profitability. I continue to be very excited by the opportunities before us. Our core business of wide area wireless for mobile computing offers ample opportunity for growth. This is a space where we have considerable experience and a legacy of leadership. I believe we have all the essential elements for success. A growing market, an excellent team, a strong and growing customer base, rejuvenated product line, and financial resources. Our priorities now and for this foreseeable future of continued strong execution on our core business initiatives, continued revenue growth and our return to strong profitability. With that Vanessa, I will open the line for questions.

Questions-and-Answer Session

Operator

Thank you. Operator Instructions Our first question comes from the line of Amit Kapur of Piper Jaffray. Please proceed with your question.

Q – Amit Kapur

Thanks a lot guys and congratulations on a pretty decent guidance.

A – Jason Cohenour

Thanks Amit.

Q – Amit Kapur

I just wanted to mainly to dig in a little bit more on the HSDPA trends you are seeing at Cingular. Do you have any kind of initial indications as to what the sell-through is like and if you could comment are we still at a stage where you are dealing with channel sale and getting the products out to the stores or you starting to see some of the sell-through, you know pull through the demand as well?

A – Jason Cohenour

I think its still a little bit early to get any definitive view on sell-through, which candidly Amit we probably wouldn’t report discretely for Cingular and to comment on that generally, but I will say you know Cingular is in the middle of a very aggressive HSDPA rollout, you know lighting out new markets as they rollout infrastructure and as new market gets lit up, you know, we think that’s a positive impact clearly on channel demand and with respect to sell-through that’s going to play out community, the reports so far on the service and our card by the way are very positive and we are pleased that the early reports from some analysts have our card performing much better than competitive cards and have the Cingular service performing at a level consistent with EVDO. So it is another true broadband play and we think that is going to have a positive impact overall a long-term on end-user demand.

Q – Amit Kapur

Great. And may be just a follow up on that. May be you could update us on your thoughts on how you see the competitor environment shaping up the HSDPA both in North America and then your strategy for reentering Europe?

A – Jason Cohenour

Well. We are coming from behind in new MCS plan as you know. With respect to our position in the US, we are more strongly positioned of course because we have got a legacy relationship with Cingular. They bought and distributed our EDGE product for the past 18 months or so. So we have got a naturally strong relationship in channel position there and in us being first to market with HSDPA cards was important not only to us, but important to Cingular as well. So they could launch their service when they wanted to launch it and actually have devices to sell to customers. So with respect to HSDPA PC cards at Cingular both this generation and next generation, we feel like we are pretty well positioned and have strong relationship equity to fallback on there. And with respect to Europe, we have got some early encouraging traction. We saw our sales in Europe bump up, this is the law of small numbers of course, but our sales in Europe were up about 220% and that was driven largely by shipments of our new HSDPA card into European customers, but we are being realistic with respect to Europe. Its going to be a tough market share battle against a couple of well established incumbents, but we are optimistic and we have got pretty good traction with some of our legacy relationships with Europe and some new relationships.

Q – Amit Kapur

Great and may be one final question before turning it over. You kind of mentioned a couple of new products lining up to launch later this year. As you look at the company and the operating expense resources that you have available do you feel comfortable generally with that level as you approach some of those new product launches?

A – Jason Cohenour

We do. Yes.

Q – Amit Kapur

Great. Thanks a lot.

Operator

Our next question comes from the line of Andrew Lee of TD Newcrest. Please proceed with your questions.

Q - Andrew Lee

Good afternoon guys.

A – Jason Cohenour

Hi Andrew.

Q - Andrew Lee

Hi. Starting off with the quarter, because there were some one-time items, have you guys calculated what the EPS would be excluding the gross margin benefit, excluding those three items on the OPEX and lastly whether the box phone can create 100% margin or not, from one million box sale?

A - David McLennan

Okay, so the impact on gross margin is $1.2 million or 3.2%.

Q - Andrew Lee

Right, there is no tax impact for that, I can pull that right to the bottomline to reverse that error.

A - David McLennan

Yeah, that is reasonable to do.

Q - Andrew Lee

Okay.

A - David McLennan

The other adjustments that we talked about would reduce on a net basis a couple of $100,000 in the OPEX line in total.

Q - Andrew Lee

Right and then again tax effect minimal or none?

A - David McLennan

Yeah, because of the size of number I would just ripple that rate through

Q – Andrew Lee

Okay, and then the box suite?

A - David McLennan

The box margins were approx. 30%, I believed the number was 27%.

Q – Andrew Lee

Okay. That’s good. And Jason for the initial - I don’t think its early that Lenovo or even talking through the two carriers, have you seen any cannibalization on the PC card, I imagine the answer is no, but what is your view as I go through both of your Cingular and PC card business?

A – Jason Cohenour

Yeah we haven’t recognized any cannibalization, and I think overall, the impact of embedded in laptop platforms is going to have the impact of growing the overall pie and it will overtime cannibalize share, but as the overall aggregate points grow. So, we look out to 2008-2009. Our view is that while the market grows, the embedded in laptop market grows faster than PC cards and at about that timeframe, we embedded inside laptops it is approximately equal to the volume of PC cards shipped in the market. It takes a few years to get there though in our view.

Q – Andrew Lee

Okay. And this one, the design wins you had for HSDPA, one of them with an existing partner and you did not say what the geography of that one was, right?

A – David McLennan

Correct.

Q – Andrew Lee

And the other one is a European based OEM?

A - David McLennan

Its an OEM focused principally on the European market.

Q – Andrew Lee

Got you, and looking at what Lenovo put out this afternoon, the only comment was with regard to their claims of that lead top of the design wins out there?

A - David McLennan

No.

Q – Andrew Lee

No comments?

A - David McLennan

No comment.

A – Andrew Lee

Okay, and lastly on the operating model rates if you get back in the block with the $40 million in revenue. Can you just refresh us as to where you think the margins can go to and then again what is the long-term pretax operating margins can be?

A – David McLennan

Yeah, these are long-term comments and just to discuss it means, you know, immediately, but certainly growth margin in the low 30s would be the target. Total loss action in the lower 20s that would give pretax earnings in and around 12% and net earnings approximately 10%.

Q – Andrew Lee

Okay. Thank you very much.

Operator

Our next question comes in the line of John Bucher of Harris Nesbitt. Please proceed with your questions.

Q – John Bucher

Yeah. Thanks. You’ve mentioned in the last question that you do expect the module mix to grow. Will there be any perceptible impact on margins as that mix becomes more even as you describe?

A – David McLennan

You know, clearly the gross margins on embedded modules is lower than the gross margins of PC cards as we have indicated in the past, but also we see overall volume growing and so well the mixed impact will be negative to gross margin but volume impact provides a positive to gross margin. So just to reiterate, we view our long-term business model at in and around the 32% on gross margin even with the changing mix.

Q – John Bucher

Then with respect to the revisions on the intellectual property licensing agreement you have, can you say whether that was a radio technology license agreement or whether that was some other software or other connectivity, can you characterize that and should we expect, I think you mentioned that we are going to see, if I am not mistaken higher cost going forward associated with that, is there anything else that would be relevant for discussion here?

A – David McLennan

No actually, we don’t expect cost to go up as a result of that intellectual property agreement. We believe that we go on a forward-looking basis with respect to our guidance and frankly our internal filing. We had the right assumption built in on a forward-looking basis with respect to the IP reserve for this particular IP holder. This particular IP holder is a very large company, who has several patents for essential intellectual property in wireless and it has been an ongoing negotiation and previously we were curling at a higher rate for our past sales and as the agreement got closer to closure and ultimately closed in December we had a lower rate on past sales, a royalty rate on past sales than we had been accruing for. So we reversed it up, but on a going forward basis we do not view that as increased tax.

Q – John Bucher

Thank you. Final question, in terms of new business development opportunities. Are there other embedded module opportunities that you are looking at besides notebooks that would have comparable total volume opportunity? Anything back in the smart phone area or any other type of opportunity that you are looking at right now?

A – David McLennan

Yeah, we are very focused on mobile computing and that is more than just laptop computers. Smart phone opportunities come up from time to time. There are not as many and not as well developed as the laptop opportunities in our view. And we are seeing opportunities in the router space as well, we are incorporating our 3G wireless modules and size but that’s a developing area that we are interested in and have some early customer interest in as well.

Q – John Bucher

Thank you.

Operator

Thank you. Your next question comes from the line of Dev Bhangui of Haywood Securities. Please proceed with your question.

Q – Dev Bhangui

Hi, good evening guys and congratulations on a very good quarter including a very good forward-looking guidance as well. Just had a question first in terms of the possible traction in Europe. In terms of the productivity in David’s comment, Jason I think less details have been given regarding the possible tractions with respect to carriers and PC cards in Europe. Given the company’s marketing relationship with Nokia and Cingular having around, I think three properties going forward with Nokia as well as (low audio) in banks with O2 and kind of the alliance that, what are your thoughts in terms of when we will be able to share any kind of definite announcements with Nokia alliance helping out in terms of all those carriers.

A – David McLennan

Yeah, we basically did, we have had a relationship with Nokia as you know and as we have announced and that has opened up some interesting opportunities. I am not going to comment specifically which opportunities of course we are getting any benefit out of with respect to that relationship, but with respect to new announcements and launch announcement of our HSDPA PC cards in Europe. We need to be mailing those down now and we are and you know hopefully in the first and second quarters you will see some news flow on that.

Q – Dev Bhangui

Okay. Specifically this is with respect to the one that was announced in the Philippines the Globe Telecom, can you confirm or deny that (low audio)?

A – David McLennan

I am sorry. What announcement Dev?

Q – Dev Bhangui

The announcement with respect to a carrier in the Philippines Globe Telecom?

A – David McLennan

Yeah. We don’t have anything to disclose on that.

Q – Dev Bhangui

Okay. Then turning around in terms of I guess the 2.6 version of a HSDPA PC card. Do you think that, I mean, Sierra has always said that we will always be and try to be the leader in terms of new releases of both the power factors? Do you think that having Cingular trial with 3.6 version of the competitors, are you going to be in a similar position you believe as Cingular moves from 1.8 version to 3.6 version with effect that you have relationships?

A – Jason Cohenour

First, I will comment on the development issue. We are going very hard on a 3.6 initiative. We made it to market first with 1.8. Our goal is to reverse the market with 3.6, but we know it is going to be a horse race. We are not overconfident on that, but that is certainly our aim to be first to market again with that next generation version and with respect to our relationship with Cingular we are confident in our relationship there that we have got a good strong relationship. We supported them extremely well. They recognized that and we have got we have been very busy with them in the sales marketing inside as well in terms of stimulating demand and closing deals. So, I am confident we will have a very good opportunity there when it comes to 3.6 as well.

Q – Dev Bhangui

Okay, I guess the only reason I asked is because the company review says that it is going to be tri-band origin in both the form factors that is PC card as well as in embedded module so are there certain frequency bands or certain geographies, which are excluded from that.

A – Jason Cohenour

Well no, when we get to our next generation, it will be a tri-band UMTS, so it will cover the 2100 MHz bands for UMTS, as well the 800 and the 1900. So, effectively all the global UMTS bands as well as all four of the global GSM bands. So, it becomes a global device. Did that answer your question, Dev?

Q – Dev Bhangui

Yes, thank you. And just in terms of, Jason, you said that you guys are working with some laptop OEMs have already commenced integration activities. Is that with respect to, I guess, which will be the new laptop OEMs and are these wins the potential wins that you might announce with respect to HSDPA or HSDPA as well as EVDO and what would be the timings you think right now that you guys will start shipping the products to some of these new OEMs?

A – Jason Cohenour

As we said, we finally start shipping HSDPA minicards in early 2006 and we have not disclose specifically when you will see those laptop partners launch, but count on them being you know certainly not past the first half of the year.

Q – Dev Bhangui

Okay because I mean, I just want to distinguish that you guys have announced two wins and you said the comment is that there are some additional laptop OEMS which have already started commencement of the individual activities. So while we hear about these wins as we go through the following weeks I am saying, are you seeing is there any kind of a shipping base ahead of you right now, which is going to be like in Q2, Q3, or how is it playing out in terms of timing?

A – Jason Cohenour

I think it will be earlier than that.

Q – Dev Bhangui

Okay.

A – Jason Cohenour

Early 2006 is when we will commence commercial shipments, and early 2006, yeah, I want to make sure we say that correctly, will commence commercial shipments and then I think we you will see platform launches from our laptop OEM customers on a similar timeframe.

Q – Dev Bhangui

Okay. A question to Dave, obviously the last one would be what is going to be your tax rates in ’06, Dave?

A – Jason Cohenour

I think, that is still in the model Dev, I would put in a very low number, we will incur some capital tax and very small amount of income tax as well.

Q – Dev Bhangui

Towards the end of ’06 then?

A – Jason Cohenour

Sorry?

Q – Dev Bhangui

Towards the end of ’06 that would be small amount of income tax?

A – Jason Cohenour

Yes.

Q – Dev Bhangui

Okay, all the best.

Operator

Your next question comes from the line of Amy Mann of JP Morgan Chase. Please proceed with your question.

Q - Amy Mann

Hi gentlemen, it is Amy for Paul Coster, couple of quick questions, first of all regarding various entering mistakes. Our senses is that perhaps not as great as we once thought they were, Verizon spoke this morning that carrying 6 PC cards, what is your impression I guess of the competitive landscape right now and in terms of CRF specifically being able to differentiate your product in light of so many competitors.

A – Jason Cohenour

Okay, I had not heard anybody carrying 6 PC cards, but you know we feel like, I think your ask was about the US, so specifically with respect to the US, we have very strong relationships and ship significant revenue to both Cingular and Sprint. They are both 10% customers in the quarter and with respect to product differentiation, I mean we have already seen one analyst do side-by-side tests of the two available Cingular HSDPA PC cards and I think there is a clear performance difference and that certainly has been recognized by independent parties and I believe it is recognized by other users of the card as well and you know with respect to both of those relationships, we think they are quite strong, both of those companies recognized not only our product capabilities, but also our capabilities in the channel and the strength of our brand as well within user enterprise customers and so we feel pretty good about the way we are positioned and as our product line continues to strengthen and I think that will help us even more.

Q – Amy Mann

Okay, in terms of the supply constraint this last quarter, could you give a little bit more color in about what was the, I guess the positive upside obviously in terms of demand, what have you done to remedy that situation on a go forward basis?

A – Jason Cohenour

I think as we indicated in guidance, you know, one of the reasons we are guiding for negative cash flow as we were intending to build inventory. We intended on doing that in Q4 frankly, but demand was a bit stronger than we anticipated and ended up selling it instead of stocking it, but as we move forward, I think we have got our production capability lap sufficiently such that we then begin building a stronger inventory position and not leave demand unsatisfied.

Q – Amy Mann

So, you do not feel that you have any manufacturing constraints from that side then?

A – Jason Cohenour

No, certainly not, I mean from an SMP capability standpoint and from a logistic standpoint, I mean, we have got virtually limitless capacity. The challenge on supply chain always is components and those challenges are daily challenges, right, so on any given day our ops team is putting out, you know 10 or 15 different fires and the next day it will be a different 10 or 15 components and that’s just because worldwide demand is quite strong and we are just battling to get components and so, but I think we got our supply chain revved up appropriately and I think we got our purchases on the supply chain size appropriately so that we’ve minimize any unsatisfied demand.

Q – Amy Mann

Okay, and then really quickly, housekeeping Dave, in terms of any remaining Voq related revenues, the million this last quarter. How should we think about that going into 2006?

A – David McLennan

We continue to have a small quantity of both products. We did write it down at the end of second quarter 2005. So, it is going forward, it is still our sales that would be pretty minimalistic.

Q – Amy Mann

Okay, thank you.

Operator

Okay, our next question comes from the line of Glenn Tracey of Pacific International Securities. Please proceed with your question.

Q – Glenn Tracey

Thanks. First couple of clarification questions on the guidance. Dave, the stock compensation of $1 million in Q1 is that something you expect to continue to see as go through 2006 or how should we model that?

A – David McLennan

I think that is a pretty aggressive set of number, Glenn. I think using that number would not be a bad process.

Q – Glenn Tracey

Okay. And as you were developing those guidance for Q1, I mean looking back to Q4 you originally had guidance of $32 million, you exceeded that by over $5 million granted those about a million of Voq sales in there. So, I am just wondering with regard to your perspective on Q1 guidance. Did you go at or is it going to be the same way as you looked at it in Q4 in terms of your kind of rationalizing the opportunity versus what you are going to give this guidance would you say at the same sort of the level of conservatism that you are taking a look at Q1?

A – Jason Cohenour

When we set guidance Glenn, I mean we tried to set guidance such that it actually at the end of the quarter is the number we achieve with respect to Q4 guidance and we said as we gave the guidance then that we had some significant risks and uncertainties with respect to new product launches. It was a big new product launch quarter for us and that had risk to the downside. It also had risk to the upside, right. And as it played out particularly with respect to HSDPA PC cards, we were able to complete those products right on schedule, which you know rarely happens, but we completed it right on schedule and we were able to wrap manufacturing very quickly and you get products shipped out and that is really where the upside came from. So, while we are reliant in Q1 as well on some new products we are not in as an aggressive brand new product launch cycle. So, we are not launching as an example of brand new PC card if you want, so we have a little bit more predictability. We are going to be launching new mini cards. So, I think we have a little bit more predictability as we go into Q1 and I think we are also going to be in a little bit of a stronger inventory position as well.

Q – Glenn Tracey

Okay. Thanks for the clarification there. With regard to laptop vendors and the opportunities that you have there you indicated that you would talk about who those customers are and have they are closer to launch. Are you waiting for these customers to make a public announcement about the fact that they are going to launch product or is it a matter of they have announced already and you are waiting to get closer so that they give you approval, but you can talk about it and that they design from a perspective is complete and ready to go?

A – Jason Cohenour

Yeah. With respect to disclosing, who the OEMs are, we would hold the names of the OEMs out of respect for the OEMs on publicity plans and typically the OEMs want to, they are shy about disclosing any specific launch plans or partnerships before they are materially down the path on development. So, you know as we saw with some of our previous customers that it is actually quite close to launch of the laptop PC where disclosure of availability and who they are partnered with occurs and with these more recent design wins I see us going through the same in publicity schedule.

Q – Glenn Tracey

Okay. And last question with regard to you activities in EMEA you have indicated that obviously it is going to be a long battle with incumbents. Can you talk a little bit about what your strategy is, how you are going about trying to kind of get back into the EMEA market and how you are working at developing these relationships with the carriers to get design wins? What additional efforts you have to put or what additional infrastructure you are having to put in place in order to be able to achieve this?

A – Jason Cohenour

Well you know, when we first started our HSDPA development efforts, we first off decided to layer in some beefed up certification resources so that’s been, you seen that in our engineering OPEX now for a few quarters that was a big part of our get to market fast plan and certification resources particularly at the end of the development cycle and leading up for launch are vital. So, I think, we are quite strong in that area and that has helped us plough through some regulatory and carrier certification activities faster than our competitors. That is one key thing and then the other key thing is, I think we have mentioned it before. In June we did a bit of a restructuring of our European sales and marketing team too and really restructured that team to make it more confidently Europe focused, so we let some people go in June and we have rehired new people in Germany, Italy, and France and that is getting us closer to the customers and gives us a better capability to build relationships with the key operator groups in their countries and speaking the same language and I think that is quite important.

Q – Glenn Tracey

Were you actually able to hire anybody from the carriers to act on your behalf, so basically buying a Rolodex of contacts within the various carriers to be able to break in as opposing to have to developing a report?

A – Jason Cohenour

Well you know, we are not in position to disclose where we hired our guys from, but...

Q – Glenn Tracey

No, but just in general terms, I am just trying to understand how you went about these?

A – Jason Cohenour

In general terms, when we hire for those positions, we always looked for people who have relationships with our target customers. It is one of the key hiring criteria. And you know sometimes you are successful in getting salespeople that have a great Rolodex sometimes the higher salespeople who instead have great skills and leverage our existing contacts.

Q – Glenn Tracey

Okay. Thanks very much.

Operator

And next question comes from the line of Nick Augustino. Please proceed with your questions.

Q – Nick Augustino

Hi guys, I just wanted to congratulate on a good quarter and good guidance. So, I just have one question, just a quick one, can you guys talk about the pricing environments in the, I guess in the EVDO space given that there are some new entrants at Sprint and also what your expectations are for the pricing environment in HSDPA going into Q1, should I guess another supplier emerge at Cingular?

A - David McLennan

Our pricing environment, I think we characterized the pricing environment as intense before and it continues to be intense in both technologies. And so, I expect that is going to continue through this generation of HSDPA and EVDO and into the next. So, our job is to be competitive on price and win the deals and be competitive on cost and make a good margin and get our products to market before our competitors can support our customers better.

Q – Nick Augustino

Has the, I think last quarter, if I am not mistaken, you are suggesting the EVDO pricing environment was somewhat stable, I guess you are saying that it has not changed?

A - David McLennan

Yeah. It is about the same. The competition continues to be intense and our ASPs have held up.

Q – Nick Augustino

Okay thanks.

A - David McLennan

Sure.

Operator

Thank you. Our next question comes from the line of Deepak Chopra of National Bank Financial. Please proceed with your questions.

Q – Deepak Chopra

Good quarter guys.

A - David McLennan

Thanks Deepak.

Q - Deepak Chopra

I will be quick here. Can you talk a little bit about what the book-to-bill, and what’s your backlog is entering this quarter and if it can be designated as qualitatively?

A - David McLennan

Yeah. We do not disclose book-to-bill and we do not disclose backlog, but qualitatively bookings were strong and they were strong in Q3 as well and we have got good visibility into Q1 revenue.

Q - Deepak Chopra

And typically, what is it thirty or sixty days lead time you won from your customers in terms of the PC card business or can you help us understand the buying cycle a little bit better?

A - David McLennan

Sure. Typically, what we try to do is get a six-month on the PC card side. We try to get six-month roll in our forecast from our customers and generally we are successful getting that, not always, and then we build the forecast. So, you know our goal is to meet our customers forecast so that they can put DOs on us 30 or 60 days in advance and we are able to meet that demand.

Q - Deepak Chopra

Okay. That is all. Thank you very much.

A - David McLennan

Sure. Operator, we will take one more question.

Operator

Okay perfect just a moment. Our next question comes from a line of Jeff Kaval of Lehman Brothers. Please proceed with your question.

Q - Jeff Kaval

Yes. Thanks very much. You folks have done well being the coming to market first with a new technology and in the past that has led to some fluctuations as market shares changes in those channels. So, I am wondering if any of that situation may repeat itself at to what extent the competition may be a threat for you at both Sprint and Cingular over the next several quarters? And then the second part is that is do you think that Verizon will, do you have an opportunity to regain share with Verizon with the DO Rev A card in the second half of the year?

A - David McLennan

Well, Jeff thanks for making it just under the wire by the way.

Q - Jeff Kaval

Well I was delighted to be here, yeah.

A - David McLennan

Sprint’s competition has been – I mean there has been a third provider, who has just entered there, but we have been competing, we have not done a lot in that channel and we still managed to keep strong share there and we got a very strong relationship. They are a strong contributor to our Q4 revenue. So, I think we are competing pretty effectively there. And so, our job is to make sure that history does not repeat itself like what happened with us at Verizon at the start of 2005 and I think, we have learnt some lessons there, learned how to do things a bit better and as I said earlier, while we expect competition to enter the Cingular channel. We were confident in our position with them or we are confident in our position with respect to the products and planned products and I think as long as we do the right things, we will capture good strong share there. So, we are working hard to make sure history does not repeat itself and I am pretty confident it will not. And then with respect to Verizon, yeah, Verizon continues to be our customer, they are not a big customer of ours, but we did get new orders from Verizon again during Q4 and we shipped against those in Q4. They were not a 10% customer, but they were important customer and I do think with respect to capturing more share than we have there, our chances of doing that are greatly improved as we get closer to a Rev A PC card launch.

Q - Jeff Kaval

Wonderful. Thanks very much.

A - David McLennan

Thanks Jeff.

Operator

There are no further questions at this time. I will now turn it back to you.

David McLennan, CFO

Yeah, thanks very much operator and thank you to everybody for joining the call. As always management is here in the office and available to take your calls if you have additional questions. Thanks very much.

Operator

Ladies and Gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you to please disconnect your line.

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