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Sierra Wireless, Inc. (NASDAQ:SWIR)

Q2 2012 Earnings Call

August 2, 2012 5:30 p.m. EDT

Executives

Dave McClennan – CFO

Jason Cohenour – President and CEO

Analysts

Matt Ramsay – Canaccord Genuity

Billy Kim – Jefferies & Co.

Todd Coupland – CIBC World Markets

Richard Tse – Cormark Securities

Gus Papageorgiou – Scotia Bank

Deepak Kaushal – GMP Securities

Josh Goldberg – G2 Investments

Cobb Sadler – Catamount Strategic Advisors

Operator

Good afternoon and welcome to the Sierra Wireless second quarter results conference call and webcast. [Operator Instructions]. I would now like to remind everyone that this call is being recorded today, Thursday, August 2, 2012 at 5:30 Eastern Time, 2:30 Pacific Time.

I'd now like to turn the meeting over to Mr. Jason Cohenour, Sierra Wireless Chief Executive Officer, and Mr. Dave McClennan, Sierra Wireless Chief Financial Officer. Please go ahead, gentlemen.

Dave McClennan

Thanks, Colin. Good afternoon, everyone. This is Dave McClennan speaking. Thank you for joining today's conference call and webcast. With me today on the call is Jason Cohenour, the company's President and CEO.

As a reminder, today's presentation is being webcast and will be available on our website following the call. Today's agenda is as follows. Jason will provide a general business overview, I will then cover second quarter 2012 financial performance in detail as well as guidance for the third quarter of 2012, and then Jason will return for some brief summary comments and some Q&A.

Before I get started, I would like to reference the company's Safe Harbor Statement. A summary of our Safe Harbor Statement can be found on page 2 of the webcast that is now being displayed.

Today's presentation contains certain statements and information that are not based on historical facts and constitute forward-looking statements. These statements include our financial guidance summary for the third quarter of 2012 and commentary on our outlook and business drivers. Our forward-looking statements are based on a number of material assumptions including those listed on page 2 of the webcast presentation which could prove to be significantly incorrect and our forward-looking statements are subject to substantial known and unknown material risks and uncertainties. I draw your attention to a longer discussion of our risk factors on our annual information form and management's discussion and analysis which may be found on SEDAR and EDGAR as well as our other regulatory filings.

This presentation webcast should also be viewed in conjunction with our press release and with the supplementary information on our website which provides a complete reconciliation of our GAAP and non-GAAP results.

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

Jason Cohenour

Thank you, Dave. I'll start with a high-level summary of our second quarter 2012 business highlights. Overall I'm very pleased to report that Q2 was an outstanding quarter for Sierra Wireless with operating results well above expectations.

Revenue grew by nearly 20% on a year-over-year basis to $167.4 million in the quarter. Driving this growth was a combination of exceptional sales of 4% AirCard products, another quarter of strong demand from PC OEM customers, and steady growth in our machine-to-machine business. Non-GAAP gross margin improved to 30.7% and non-GAAP operating expenses were lower than expected at $38.8 million. The combination of strong revenue, higher gross margin and lower OpEx led to better-than-expected non-GAAP earnings from operations of $12.7 million and non-GAAP EPS of $0.30.

While driving these great operational results, we were also busy on the strategic front, announcing and recently closing the acquisition of Sagemcom's M2M business, significantly bolstering our leadership position in the growing M2M market.

Keeping a closer look at our mobile computing line of business, Q2 was truly an exceptional quarter. Mobile computing revenue of $89.9 million represents 36% year-over-year growth compared to the second quarter of 2011 and gross margin was a very healthy 28.1%. AirCard and PC OEM sales each contributed significantly to the strong results.

Revenue from our AirCard mobile broadband devices was up 32% year over year, driven by new product launches such as our unique Tri-Fi Hotspot at Sprint, new channel launches such as Virgin Mobile, and continued solid demand for our 4G AirCard products from key operator customers including AT&T, Sprint, Telstra, Rogers and DNA.

Revenue from the sale of embedded modules to PC OEM customers continue to grow at a strong pace in Q2 and was up 50% on a year-over-year basis. During the quarter we experienced solid contribution from a broad range of PC OEM customers including HP, Fujitsu, Lenovo and Panasonic. Revenue contribution from Japan was once again exceptionally strong as we continue to benefit from large rollouts of LTE-enabled notebooks with enterprise customers in Japan.

We also expanded our PC OEM product portfolio during Q2. In June we announced the introduction of the world's thinnest 4G LTE embedded module, the AirPrime EM7700. At only 2.5 mm thick, the EM7700 is designed specifically for us in ultra-portable notebooks, Win8 tablets, and other devices with thinness as a critical design criteria. In Q2 we secured new design wins for the EM7700 as well as other embedded module products with tier 1 PC OEMs for platforms that we expect to launch later this year and into 2013.

Looking forward, we're optimistic about the continued growth prospects in our mobile computing business based on the strength of our channel position, our robust 4G product portfolio and pipeline, expanding LTE network deployments, and new pricing plans from operators.

Without wavering in our mid to long-term optimism, we also acknowledge that Q2 was truly exceptional as nearly every growth and profitability driver in our mobile computing business aligned perfectly. In light of this acknowledgement, we expect Q3 mobile computing sales to normalize somewhat while still delivering strong year-over-year growth.

Moving to machine-to-machine, in Q2 we delivered our highest quarterly revenue ever at our core M2M business. For the quarter, M2M revenue grew by 5% on a year-over-year basis to $77.5 million. In the short term, we're unfazed that our year-over-year growth rate in M2M is below our longer-term target of 15%, particularly as we are achieving growth in the face of continued weakness in Europe. While our M2M sales in Europe have stabilized, Q2 revenue from the region was still down considerably on a year-over-year basis. This significant headwind was more than offset by strong growth in other regions including North America and Asia.

In Q2 we continued to build on our market-leading position in M2M with new design wins, new product milestones, continued progress, and expanding our position in the value chain, and of course our agreement to acquire Sagemcom's M2M business.

In automotive segment we announced the technology collaboration with Audi to demonstrate 4G LTE connected infotainment solutions for Audi cars. We also achieved an important milestone at our new product lineup of AirPrime modules designed specifically for the rigors of the automotive environment by commencing additional volume shipments of the new AR series to key automotive customers. Over the past two year we've achieved considerable design win success with automotive customers for the AR series and expect the new product line to contribute significant growth to our M2M business over time as customers begin to bring their connected car solutions to market. We also continued to experience design win momentum with OEMs in other key segments during Q2, including smart metering, transportation and industrial handhelds.

During Q2 we continued to make solid progress at expanding our position in the M2M value chain. We launched the new LTE-enabled AirLink GX440 intelligent gateway for the AT&T network. We also launched our new Aleos application framework for our AirLink product line, which includes an integrated development environment software libraries and a comprehensive set of tools that enable our customers to build customized applications that run directly on their AirLink gateways. Providing the capability to add this kind of programmability or intelligence on the edge gives our customers the opportunity to add their own unique value to their solution while also lowering the development costs and reducing time to market.

We also launched the new global M2M partnership with Vodafone. Under this arrangement, Vodafone and Sierra Wireless have started joint marketing efforts to promote the unique benefits of fully-integrated Vodafone AirVantage cloud services to support the development and deployment of new applications. In addition, Sierra Wireless AirLink gateways and routers are now available through Vodafone sales channels, providing us with broader exposure to Vodafone markets and customers around the world.

As stated on previous calls, our goal in M2M is to become the end-to-end platform of choice for OEMs, integrators and operators around the world, providing intelligent hardware, cloud services and powerful development tools to make it easier, faster and less costly to build, deploy and manage M2M solutions. I'm confident we're continuing to make significant progress towards this goal.

Now, several of you will recall, on June 18 we announced that we had entered into an exclusivity agreement with Sagemcom to acquire their M2M business. At the time the proposed transaction was subject to completion of the consultation process with employee representatives. Today I'm pleased to report that this process has concluded and the acquisition of Sagemcom M2M was completed yesterday.

As quick reminder, Sagemcom is a leading French high-technology group active in the broadband, telecom, energy and document management markets with annual revenue of approximately EUR1.5 billion. Over the years, Sagemcom has successfully built a growing M2M business that includes 2G and 3G-embedded wireless modules as well as industry-leading rugged terminals for GSMR applications.

In this transaction we acquired substantially all of the assets of the Sagemcom M2M business for EUR44.9 million in cash consideration plus certain assumed liabilities. The cash consideration for the transaction was funded entirely using cash on hand. A total of 82 Sagemcom employees have now joined Sierra Wireless in Paris, France and Shenzhen, China.

Acquiring the Sagemcom M2M business aligns with our company strategy to be the clear global leader in M2M. Sagemcom M2M provides Sierra Wireless with a significantly enhanced market position in key M2M markets including payment, transportation and railways as well as new geographical expansion into Brazil. Furthermore, we expect the acquisition to bring volume scale and resource capacity to our entire business, enabling us to lower overall product costs, to reach more customers, and to strengthen our execution capability.

In the first half of 2012, Sagemcom M2M generated pro forma revenue of approximately EUR17 million and was profitable. We expect Sagemcom M2M to contribute to our Q3 financial results as of August 1. Given we have owned the business for only one day and that Q3 will be a transition period with many moving parts, we will not be providing guidance for the Q3 Sagemcom contribution today. However, we plan to provide guidance for the Q4 Sagemcom contribution when we announce our Q3 results in early November.

Turning to the next slide, I believe this chart helps to further illustrate the logic behind the acquisition. According to the latest report from ABI Research, our M2M market share takes another leap forward with the addition of the Sagemcom M2M business, taking our 2011 global market share from 30% to over 34%, making us the clear market leader in an exciting secular growth market.

Overall I'm very pleased with the acquisition of the Sagemcom M2M business. Together we'll offer the broadest M2M product portfolio in the world and the leading position in several high-growth segments and continue to invest in solutions across the M2M value chain. Furthermore, we'll have unmatched scale and execution capacity, enabling us to drive more value for all stakeholders including customers, employees and shareholders.

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

Dave McClennan

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

As Jason indicated earlier, Q2 was just a great quarter for us. Starting with our GAAP results, we had net earnings of $3.6 million or $0.11 per share. That compares to a GAAP loss of $6.8 million or a loss of $0.22 per share the year ago.

The second quarter was much stronger than we expected. On a non-GAAP basis, our results exceeded all of the guidance metrics. Revenue of $167.4 million was ahead of our guidance range of $157 million to $162 million. Earnings from operations of $12.7 million was significantly above our guidance range of $8.5 million to $9.5 million. And net earnings of $9.3 million or $0.30 a share was well above our guidance range of $5.7 million to $6.5 million or $0.18 to $0.21 per share. So, Q2 was an exceptional quarter where everything wound up nicely to drive better-than-expected results.

As a reminder, the reconciliation between our GAAP and non-GAAP results is provided in the press release as well as in the Investor Relations section of our website. Non-GAAP results exclude the impact of stock-based compensation expense, acquisition amortization, impairment, acquisition costs, integration costs, restructuring costs, foreign exchange gains or losses on foreign currency contracts as well as translation of balance sheet accounts at certain tax adjustments.

Looking at revenue, in light of business mix for the second quarter of 2012, revenue grew by 19.7% on a year-over-year basis to $167.4 million in the quarter, and sequentially relative to Q1, revenue grew by 11.4%. Driving this year-over-year growth was the combination of exceptional sales of 4G AirCard products, another quarter of strong demand from PC OEM customers, and steady growth in our machine-to-machine business.

In the second quarter 2012, our machine-to-machine business accounted for 46% of total revenue while our mobile computing business accounted for 54% of total revenue. Sprint, which includes Virgin Mobile, Telstra and AT&T, each accounted for more than 10% of total revenue in the quarter and in aggregate contributed 39% of total revenue.

We continue to make good progress in improving our profitability. Non-GAAP gross margin as a percentage of revenue improved to 30.7% in the second quarter. That's up from 28% a year ago and up sequentially from 29.8% in the first quarter of 2012. This gross margin improvement was the result of exceptionally-favorable product mix and continued realization of product cost reductions. On a segmented basis, machine-to-machine gross margin was 33.7% and mobile computing was 28.1%.

Non-GAAP operating expenses were lower than expected at $38.8 million, primarily due to a shift in the timing of some new product development expenses into Q3.

Good revenue growth in the quarter combined with improved gross margins and lower expenses drove non-GAAP earnings from operations to $12.7 million, up from a loss of $0.8 million a year ago and up sequentially from the $5.2 million we reported in Q1. On an EPS basis, non-GAAP earnings were $0.30 per share, up from a loss of $0.03 per share a year ago and up from the $0.16 we reported in Q1 of 2012.

Turning to the balance sheet, our financial capacity remains strong. During the quarter we increased our cash position by $18.5 million to $125.3 million. Cash flow from operations was extraordinarily strong at $28.4 million. This was driven by positive earnings and favorable working capital changes. Partially offsetting this was CapEx of $5 million, the purchase of 203,000 shares via the restricted share unit trust for $1.5 million, as well as the purchase and cancellation of 400,000 shares under our share buyback program for $3.3 million.

Subsequent to the quarter-end, we closed the acquisition of the Sagem M2M business yesterday. This utilized approximately $56.2 million of our cash, which is the US dollar equivalent of the EUR44.9 million purchase price. On a pro forma basis at June 30, including the use of the cash for the acquisition, we would have had approximately $69 million of cash and cash equivalents.

Moving on to guidance, the third quarter is a transitional one with many moving pieces related to the acquisition of the Sagem M2M business. Accordingly, we are providing guidance for the third quarter excluding the impact of the acquisition which just closed yesterday. This guidance is on a non-GAAP basis, which excludes stock-based compensation expense, acquisition, amortization, impairment, acquisition costs, integration costs, restructuring costs and foreign exchange gains or losses on foreign currency contracts as well as on translation of balance sheet accounts and certain tax adjustments.

In the third quarter of 2012 we expect revenue to be between $157 million and $162 million. This decrease on a sequential basis is primarily driven by a more normalized sales pattern in our mobile computing business following an exceptional second quarter. We expect gross margin to decline from the extraordinary high level in Q2 due to shifts in product mix and normalized AirCard average selling prices.

Operating expenses are expected to increase sequentially from Q2 due to the shift in the expected timing of certain R&D expenses from Q2 to Q3. We expect this to result in non-GAAP earnings operations of between $6 million and $8 million and non-GAAP net earnings of between $4.3 million and $5.7 million, or diluted earnings per share of $0.14 to $0.19. Incorporated into this guidance is an effective tax rate estimate of 27%. And once again, this guidance excludes the impact of the acquisition of Sagemcom and -- of the Sagemcom M2M business.

In the third quarter we expect to incur further restructuring costs related to the closure of our Newark, California facility, and we will incur transaction costs related to the acquisition of the Sagem M2M business. And these costs are not included in the Q3 non-GAAP guidance.

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

Jason Cohenour

Thanks, Dave. So, to summarize, we're very pleased with our outstanding results for the second quarter of 2012. Revenue growth was strong and we delivered solid profitability and cash flow. Our M2M business continued to experience steady year-over-year growth despite significant macroeconomic headwinds in European markets. We continued to build on our global market share leadership position organically and inorganically with the acquisition of Sagemcom M2M. And we once again achieved demonstrable progress in expanding our position in the value chain.

In mobile computing, we delivered exceptional growth and strong profitability. Our Q2 success was underpinned by our strong 4G product lineup, solid channel position, new AirCard launches, and continued growth with PC OEMs. Coming off this remarkable performance, we expect mobile computing sales patterns to normalize somewhat while still delivering solid year-over-year growth.

Looking forward, we continue to be very excited about the profitable growth opportunities that lie ahead. We remain focused on capturing these opportunities, on driving growth, and delivering improving operational results with the goal of creating long-term sustainable shareholder value.

Operator, with that, that concludes our prepared remarks. You can now open the line for questions.

Kyle, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions].

Your first question comes from the line of Mike Walkley from Canaccord Genuity. Your line is open.

Matt Ramsay – Canaccord Genuity

Good afternoon, Jason and Dave. This is Matt Ramsay on for Mike. First of all, congrats on obviously the very strong quarter and the closing of the acquisition yesterday, and thanks for taking our questions.

Obviously a very strong quarter on mobile computing on both sides of the mobile computing business. Could you talk, Jason, a little bit more about the reasons behind the big beat and I guess how it relates to your sequential guide down in mobile computing? Did the channel fill at your big LTE customers just happened a bit more bursty than you might have thought? And I guess now you're guiding conservatively to wait and see on sell-through or you're just seeing sell-through start to plateau and you may be guiding a little bit conservatively because of that? So, any more color would be really appreciated.

Jason Cohenour

Sure. I think as we mentioned, Matt, Q2 was certainly exceptional in mobile computing. Really helping that significantly were a couple of big new launches, one with Virgin Mobile, another, a new product launch with Sprint. And yeah, I think it's too early to tell what sell-through rates are going to be with those two new launches. So, certainly there were some channel fill there in Q2, and I think we need to be conservative here on what to expect in Q3 given uncertainty on sell-through rates at this point in time. So that was clearly a driver in Q2 and it is also a driver of our conservatism on the Q3 outlook.

On PC OEM, we saw a combination of things happen. Again, quite an exceptional quarter in Q2 and we saw a couple of things happen. I would say continued healthy demand trends, but also some lumpy, good for us in Q2, some lumpy business with some big enterprise customers, in particular in Japan. So again I think it would be -- wouldn't be really accurate for us to assume that we're going to get those large enterprise rollouts every quarter. So again that's hollering our approach to the Q3 guidance around PC OEM.

Matt Ramsay – Canaccord Genuity

That's great, Jason. Thanks for the color, that's really helpful. I guess on a follow-up to that, in the embedded business, would you then have -- still have pretty strong hopes for Q4 with the Win8 launch, and maybe Q3 is a little bit of an air pocket ahead of that, potential momentum and reacceleration in Q4?

Jason Cohenour

Yeah. I think, you know, we are, as we've pretty consistently said, I don’t -- and our short-term growth track record probably is going to show this, because it is the pretty big, pretty gaudy numbers, percentage numbers off a small base, of course the base is now growing too. But so we've been pretty cautious around how we talk about the growth opportunity, but we put up over $17 million in Q2 and that was up from a pretty healthy $15 million in change in Q1.

So I think we're pretty optimistic about the longer-term growth prospects. We haven't yet seen contribution from ultra-books as an example or Win8 tablets, and certainly we've got design wins in those -- in platforms -- in such platforms. So I'd say we're cautiously optimistic, Matt, is the way to put it, and at this point in time we're still viewing it as a continued growth opportunity, although I think we'll probably drop off a little bit here in Q3 because, like I said, we're not expecting a large enterprise rollout like we experienced in Q2.

Matt Ramsay – Canaccord Genuity

Okay, that's fair. And then one more from me and I'll pass the line. Dave, I just wanted to ask a couple of questions around the acquisition, and obviously just closed yesterday and congratulations again on that, and I definitely understand why you guys haven't included it in the guide, considering it just closed yesterday. And you did provide some first-half revenue metrics for the business you're acquiring, but on the acquisition call you did a month or so ago, you also talked about the gross margin in that business being around that 35% M2M target that you guys had talked about and the operating margin of that acquired business being above 5.5%. Are those metrics -- I guess, first of all, am I remembering those metrics correctly and are they current? And also, help in modeling, any kind of color you could give on that going forward would obviously be appreciated.

Dave McClennan

Yeah. No, Matt, you're recalling the metrics correctly. Yeah, this acquired business would have a similar profile of gross margin to our M2M business. And you're right, we indicated the operating margin was, I think what we said at the same time was that it was above what we were guiding in the quarter which was 5%.

Matt Ramsay – Canaccord Genuity

Okay, great. All right, well, that's it for me. Congrats again on a great quarter and good luck going forward.

Jason Cohenour

Thanks, Matt.

Dave McClennan

Thanks, Matt.

Operator

Your next question comes from the line of Peter Misek from Jefferies. Your line is open.

Jason Cohenour

Hi, Peter, are you there?

Kyle, I think we may have lost Peter.

Billy Kim – Jefferies & Co.

Hello?

Jason Cohenour

Hi. Is that you, Peter?

Billy Kim – Jefferies & Co.

Hi. This is Billy Kim filling in for Peter.

Jason Cohenour

Hi, Bill.

Billy Kim – Jefferies & Co.

Hi. Just a quick question in terms of Verizon and the tethering plan with FEC that was recently updated. Just wondering if there's been any changes there in terms of your strategy and how that affects your business.

Jason Cohenour

At Verizon?

Billy Kim – Jefferies & Co.

Yes, with the tethering plans, the family plans with the tethering.

Jason Cohenour

Yes, with the -- yes, yes, okay, with the family plans. So maybe just a point of clarification, we don't have any AirCard exposure to Verizon, but we won't benefit from any uplift on as a result of those family plans at Verizon, or any negatives there as well. So, our exposure to Verizon is mainly on the OEM side of our business, and that includes both our machine-to-machine business as well as PC OEM, and for that matter, our AirLink terminals.

Now, as you know, there's been a lot of talk about similar pricing plans coming from Verizon competitors such as AT&T, and in that case, of course, we would have exposure to whatever those plans drive in terms of demand changes. I would say on balance we are -- on balance we, you know, we're positive on those family plans. We believe that they are conceptually fairly supportive of the mobile hotspot device category and certainly are optimistic and hopeful that that will drive increased demand. And if that doesn’t indeed happen, then we would stand to be a direct beneficiary.

Billy Kim – Jefferies & Co.

Okay. Thank you.

Jason Cohenour

Welcome.

Operator

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

Todd Coupland – CIBC World Markets

Yeah, good evening, everyone.

Jason Cohenour

Hi.

Todd Coupland – CIBC World Markets

Nice quarter. I'd like to offer my congratulations as well. I guess I'm still trying to understand the upside and then the downside of Q2 and Q3. And the way I'm thinking about it, tell me if you think there's any merit in this, is you benefited from the 4G fill, I'm not sure if the Japanese enterprise was 4G as well.

Jason Cohenour

It was.

Todd Coupland – CIBC World Markets

Pardon me?

Jason Cohenour

It was.

Todd Coupland – CIBC World Markets

Yeah. So, while you can't see the large enterprise or further 4G take-up, why would it stop after one quarter?

Jason Cohenour

We don't expect it's going to stop, but -- or are you talking about the enterprise rollout in Japan? That was really --

Todd Coupland – CIBC World Markets

No. I understand like you covered that customer, but why wouldn't there be other large enterprises and follow-on 4G take-up at the kind of pace that you saw in Q2? I guess I'm just wondering why is it just isolated to Q2 when we're really just seeing the first 4G --

Jason Cohenour

Right, right. Okay, I got you. No, it's not isolated just to Q2, but for Q3 we don't have this ability to another similarly signed enterprise customers, as an example. And with respect to our AirCard products, as I mentioned earlier, we certainly benefited in Q2 from the initial quarter of a launch, which usually means significant ship in to get the channel charged up, and then some digestion as sell-through occurs.

Now, we don't have visibility to exactly what those sell-through patterns are going to be, and that's causing us to be a little bit cautious in Q3. That doesn’t mean our view is that's the end of the demand growth driven by LTE, right? In fact, we fully expect that LTE will continue to drive demand growth. We just don't expect to see it as strong in Q3 as we experienced in Q2.

Todd Coupland – CIBC World Markets

Okay.

Jason Cohenour

I'll point out, by the way, that that Q3 guidance, while it's down sequentially, still pretty darn good. It represents considerable year-over-year growth and considerable improvement in profitability results on a year-over-year basis.

Todd Coupland – CIBC World Markets

Okay. That's good. And my second question is on the M2M business, with the headwinds driving 5% growth, I mean, Europe is probably an issue for a while, so, is that about the right growth rate to model for the next little while given the questions on European economy?

Jason Cohenour

So, yeah, Europe's definitely, you know, not going to solve itself here in a quarter. I'll also point out that on a -- and perhaps it's a small piece of data here, but on a constant currency basis, our M2M business was actually up 7%, not 5%. Clearly off our long-term target of 15%. So what should we expect here in the short term? I think we're going to probably bounce around here in the low single digits for at least a couple of quarters, would be my expectation. And the wildcard is what happens in the -- with the macroeconomic situation, in Europe and other regions, frankly.

So the good thing is, you know, all of the factors within our control, I think we're driving those factors to our benefit. And just to give that a bit of color, Europe in our M2M business was down on a year-over-year basis 25% -- 25%. And we were able to more than offset that with great growth in North America and very solid growth out of Asia. So, you know, where the markets are ticking along, I think we're doing extraordinarily well. And when Europe returns, we'll be in a great position to capture the demand when it comes back.

Todd Coupland – CIBC World Markets

Okay, that's great. One last question, so I read the OpEx commentary as think about it in the $40 million range x Sagem for the next little while given all the puts and takes you mentioned. Is that about right?

Dave McClennan

Yeah, Todd, this is Dave. I don’t want to comment on any specific number, but that would be a reasonable assumption.

Todd Coupland – CIBC World Markets

Okay. Great. Thanks very much, guys.

Dave McClennan

Thanks.

Operator

Your next question comes from the line of Richard Tse from Cormark Securities. Your line is open.

Richard Tse – Cormark Securities

Thanks. Todd took my question there on Europe, but maybe I'll sort of ask it another way. Yeah, as you said, a record quarter last quarter and clearly that [subsided] on Europe being down 25%, it was meaningful. Specifically the M2M business, do you think all the pieces are in place in terms of the building blocks from the market to capture that 15% growth once Europe comes back, or are there sort of other pieces that need to be put in place generally speaking just for the broad market here?

Jason Cohenour

Yeah -- for the broader market?

Richard Tse – Cormark Securities

Yes.

Jason Cohenour

You know, I do. I believe the pieces are in place. In a healthy macroeconomic situation, I think the market should grow 15-plus-percent. We feel pretty comfortable with that. And the real short-term impact here is Europe. And I believe in the fullness of time, you know, more pieces will fall into place to make it easier for OEMs and enterprises to build and deploy applications, and hopefully that further enhances the market growth rate. And we're very busy positioning ourselves as the leader, so when that, if and when that growth rate goes up, we benefit directly.

Richard Tse – Cormark Securities

Okay. And just sort of switching gears here to the mobile computing business, obviously it sounds to me that you're waiting to see what the sell-through is like. So let's say you get the sell-through rates at kind of your optimistic scenario playing out, would that be -- would your guidance be then be as conservative or how should we look at that?

Jason Cohenour

Well, yeah, I mean absolutely. I mean if sell-through rates are higher than we expect, then that would make our guidance conservative. But I think we've got a pretty good balanced view, and I think our expectations are, you know, while we don't have perfect visibility, we've talked about it quite a bit, and we feel like our guidance is, you know, provides a good balance of risk versus upside. And like I said, looking beyond Q3, we're still quite optimistic in that, you know, that with the general growth drivers that we see in the marketplace. We again generally believe that the deployment of more LTE service by our customers like AT&T and Sprint should be a good thing for our business.

Richard Tse – Cormark Securities

Okay. And then one follow-up question with respect to the Sagemcom acquisition, because you guys paid this in cash. Now, what sort of the level of cash you want to keep within the company to sort of just maintain operations, and maybe if you could talk about the facilities you have available on that side.

Dave McClennan

Sure. It's Dave speaking, Richard. So with the acquisition on a pro forma basis, that puts us at $69 million. And I think that's ample cash to satisfy the operating needs of our business. We do like to have a strong balance sheet, particularly with doing with suppliers and customers, because that's important to them. And so we need to demonstrate a strong balance sheet.

So, to that end, we're contemplating -- we have a small line in place now of $10 million, and to that end we're contemplating an increase in that line just to give us some additional financial capacity if required.

Richard Tse – Cormark Securities

Okay, that's great.

Dave McClennan

But still very strong balance sheet.

Richard Tse – Cormark Securities

Okay. Thanks.

Operator

Your next question comes from the line of Gus Papageorgiou from Scotia Bank. Your line is open.

Gus Papageorgiou – Scotia Bank

Hi, thanks. Great quarter, guys.

Jason Cohenour

Thanks, Gus.

Gus Papageorgiou – Scotia Bank

On the embedded side, so you're up 50% year over year. Can you give me a sense of what do you think the market grew year over year? And in that market segment, I mean you have one big competitor that's exiting. I think you said that you should start seeing some design wins come in, in the second half, stronger versus the first half as a result of that big competitor exiting. So, is that still true in -- would we expect that that momentum gets stronger as we go through the second half, barring some of these kind of one-time things, like the Japanese enterprise rollouts?

Jason Cohenour

Sure. I think -- so with respect to market growth, Gus, I think what we're seeing in our business, which is put up, like I said, pretty gaudy year-over-year percentage growth numbers again off a small base. I think what we're seeing there is mainly a share gain on our part. Market growth, tough to say right now. Certainly there's not a lot more notebooks being sold currently. So, any market growth right now would be coming from increased penetration, any increased penetration of 3G and 4G devices inside of notebooks and tablets.

I do think that's on the rise, so I do think penetration is increasing. Don't have a good market stat for you at this point in time, but penetration is so low now I think there's probably nowhere but up in terms of penetration. So as penetration rates increase, I think we're well-positioned to benefit from that.

And yes, we had a large competitor recently exit the market, Ericsson, and that -- we have benefited from that in terms of some new design wins, and we certainly expect that those new design wins will contribute to our business in the coming periods. It's not going to be immediate, but we do have the design wins, and as those customers roll out their platforms, we will benefit from that.

Gus Papageorgiou – Scotia Bank

Okay. Just one quick follow-up. Can you give us a sense of what your win rate is when you go in for -- it's probably you and one other competitor going in for these design wins? Can you give us a sense of what you think your win rate is?

Jason Cohenour

Give you a sense of what our win rate is with PC OEMs. It's pretty high. We don’t win them all and there are some significant competitors, Novotel continues to compete well in that space, Huawei is in that space, there are some new chipset suppliers into that space as well. So it's a pretty dynamic competitive environment, but we win more than we lose, I guess I'll leave it that way.

Gus Papageorgiou – Scotia Bank

More than 50? Hello?

Jason Cohenour

Yes, hello, Gus?

Gus Papageorgiou – Scotia Bank

Hi. Sorry. So you'd be more than 50%win rate, is that what you're saying?

Jason Cohenour

I think so. I mean that's kind of off the top of my head, but I think our win rate is greater than 50%.

Gus Papageorgiou – Scotia Bank

Okay, great. Thanks a lot.

Dave McClennan

We don't chase all the business though, so.

Jason Cohenour

That's very true.

Gus Papageorgiou – Scotia Bank

Okay. Thanks.

Jason Cohenour

You're welcome.

Operator

Your next question comes from the line of Deepak Kaushal from GMP Securities. Your line is open.

Deepak Kaushal – GMP Securities

Thanks for taking my question. I wanted to ask a bit more about the Vodafone partnership. I was wondering if you guys could talk about what are the big applications and opportunities you see for end-use for the partnership in the products and services you guys have been rolling out and when you might expect it to be a meaningful part of revenue and how it might grow.

Jason Cohenour

Well, it's very small right now, right? So again there's, I think there's nowhere -- nothing but upside, as a result of the Vodafone relationship. And by the way, we've been building this relationship for the past two to three years. We're now hitting some tangible milestones. We -- our AirLink products are actually channelized now by Vodafone. Tough to say how that's going to drive additional growth in the AirLink products, but of course it's better to be in the Vodafone channel than not. And certainly in the fullness of time, I fully expect that's going to add to -- that's going to help accelerate our growth rate.

With respect to the cloud services, kind of a unique position here. Now, what applications are going to have uptake on that remains to be seen. But what we've found with our AirVantage business is that AirVantage seems to serve better those markets that are currently under-served by vertical market application providers. Just to give that a little color, it's not very hard to find application providers for fleet management, as an example, or smart metering. So it's unlikely that AirVantage will be delivering the application enablement for those well-served markets. But for the underserved markets, and we've seen these in our business already, monitoring industrial equipments such as giant air compressors or water purifiers or coffee machines, those are the kind of what I would say unusual or underserved markets that are going to be well-served by an application enablement platform like AirVantage.

And I think the cool thing about this relationship with Vodafone is that as the -- it's one of the few operators where we've actually got this joint platform initiative. So it's the Vodafone subscription management platform combined with the AirVantage application enablement platform. So, really working these things together and going together to stimulate demand with these -- in these underserved segments. So I'm optimistic. I think it definitely will be a driver of opportunities.

Deepak Kaushal – GMP Securities

Okay. And for your revenue streams on that, would they be subscription-based?

Jason Cohenour

They would be subscription-based. Yeah, on the cloud services, they would be subscription-based sold on an AirVantage services or sold on a software-as-a-service basis.

Deepak Kaushal – GMP Securities

Okay. Great. Thank you.

Jason Cohenour

Welcome.

Operator

Your next question comes from the line of Josh Goldberg from G2 Investments. Your line is open.

Josh Goldberg – G2 Investments

Hey, guys, a couple of questions here. $160 million in the midpoint of the range for the third quarter, can you break down how much you think it's going to be M2M versus mobile computing?

Jason Cohenour

Well, we're not giving segmented guidance, Josh. We've tried to provide some directional guidance on that for you.

Josh Goldberg – G2 Investments

Okay.

Jason Cohenour

You know, by providing commentary around mobile computing. We don't expect mobile computing to be quite as frothy in Q3 as in Q2.

Josh Goldberg – G2 Investments

Okay. So if M2M even stays flat, your gross margin should improve just based on mix?

Jason Cohenour

Yeah. I think -- I'd be a little bit careful there because there's a few moving pieces on gross margin. Q2, extraordinary quarter, we had a lot of things align with respect to not only revenue but also gross margin. We had a favorable mix within our M2M business, including contribution from NRE services which have a disproportionate positive impact on gross margin. And I'll also point out that we had extraordinarily strong mobile computing gross margin and not sustainable, I would say, mobile computing gross margins. So I think we'll see that fall off a bit in mobile computing. And we expect that our mix overall and within M2M will not be quite as strong as it was in Q2.

Josh Goldberg – G2 Investments

Okay. And can you talk about -- you mentioned Ericsson's bust of the market, roughly how much do you think they were doing in terms of revenue before they left?

Jason Cohenour

You know, I think they were doing probably about a million devices, about a million devices a year or so. So, probably north of $50 million I would say.

Josh Goldberg – G2 Investments

Okay. And that was mostly the external cards or also internal?

Jason Cohenour

No, only internal. Only internal. Ericsson is not in the external or mobile broadband device category.

Josh Goldberg – G2 Investments

Got it. Last question, you mentioned that the Sagemcom business did $17 million in the first half of the year, is that correct?

Dave McClennan

Europe.

Jason Cohenour

Europe, yeah.

Josh Goldberg – G2 Investments

Sales to Europe. And last year 2011, you said, in the last conference call, did $39.9 million for 2011.

Jason Cohenour

Correct.

Josh Goldberg – G2 Investments

Was it down first half '12 versus first half '11?

Jason Cohenour

No.

Josh Goldberg – G2 Investments

Was not. So you -- the company generally has a stronger second half to their year?

Jason Cohenour

That’s correct.

Josh Goldberg – G2 Investments

And you anticipate growth in 2012 versus 2011 for Sagemcom?

Jason Cohenour

Yeah, I think, you know, without getting ahead of ourselves on guidance, I think their first-half revenue was in line with our expectations and was up slightly year over year, so.

Josh Goldberg – G2 Investments

Okay. And just in terms of even getting to the price that you paid. I mean, clearly they're paying almost 1.5 times or a little over 1 times revenues for their M2M business. It's higher than what your embedded value is. How did you get to that valuation? Was it based on their profitability or what are the reasons that you arrived to get there?

Jason Cohenour

Yeah. Well, of course, we went through the valuation analysis in great detail, but. So, first of all, nowhere 1.5 times revenue. That's one thing. So it's slightly over 1 times revenue. There are a number of transaction comparables that support the 1 to 1.2 times revenue valuation. And by the way, in a number of those, and I'm talking about M2M transactions, and in a number of those transactions, those companies that sold for that value were not profitable. So, you know, with Sagemcom, we had the benefit of support from the market in terms of transaction values and the added benefit of significant profitability that we haven't seen in a lot of the comparable transactions.

So I think we've paid a very fair price, and the most recent transactions were -- certainly support the price we paid. And I think we got -- the way I think about it is we got -- we paid a very fair price on the revenue and we got a bargain on the profitability.

Josh Goldberg – G2 Investments

Okay, great. Thanks so much.

Jason Cohenour

You're welcome.

Operator

Your next question comes from the line of Cobb Sadler from Catamount. Your line is open.

Cobb Sadler – Catamount Strategic Advisors

Hey. Thanks a lot for taking the questions. Just a question on your mobile hotspot market share in your major customers in North America in the second half of the year, in 2013. Do you expect any new entrants into -- in your two major carriers? Thanks a lot.

Jason Cohenour

Yes, sure. So we have, in North America, our two major carriers of course are Sprint and AT&T. We have, I would say, extraordinarily high share in both of those channels. Right now at AT&T, to my knowledge, we're the only provider of LTE mobile broadband devices, so we can't increase our share there. So certainly I would expect that 100% share is not sustainable, so our expectation is that at some point here, probably by the end of this year or early 2013, will be shared by another -- by a competitor in that channel, which is quite common.

We generally coexist with at least one or two competitors in our major channels and in our job and we're quite confident in our ability to do that. Our job is to make sure that we have the largest share in the channel. So, certainly that's what we'll be focused on, but 100% share in a given channel likely not sustainable, but very pleased with the fact that we've been able to command significant channel share at each of our large operator customers.

Cobb Sadler – Catamount Strategic Advisors

Okay, got it. Thanks a lot.

Operator

There are no further questions at this time.

Jason Cohenour

Okay, great. Kyle, I think that ends today's call. We can go ahead and wrap it up.

Operator

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

Jason Cohenour

Thank you, everybody.

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