Anirban's SWIR Q1 2015 Notes

Saul asked me to repost my SWIR notes from Q1 2015.




Highlights from the Earnings Release & Presentation

  1. Q1 15 revenue was another record, at $150.4M; 24% YoY growth. Q4 2014 record revenue of $149.0 million; 25.7% year-over-year growth. Q3 Revenue was $143.3M, a 27% YoY increase over Q3 2013. Nice growth, with some sequential growth as well. SWIR seems to under promise and over deliver, with them again beating the high-end of their guidance which was at $149M.

  2. Non-GAAP net earnings from operations was $8.8M, which was up 12x over Q1 14. Note that Q4 2-14 non-GAAP earnings from operations was $10.0 M, and Q3 2014 was $8.4 M.

  3. Non-GAAP eps came in at $0.22. Non-GAAP EPS was $0.29 in Q4 2014. Note that they had guided for non-GAAP eps of around $0.17 at the mid-point, so it was a handy beat on the (non-GAAP) bottomline.

  • revenue of $145 - $148M
  1. Gross margin was 32.6% versus 32% in Q1 2014, but down from 33.6% in the fourth quarter of 2014. These are non-GAAP numbers.

  2. Cash and cash equivalents at the end of the first quarter of 2015 were $99.6 million, representing a decrease of $107.5 million, compared to the end of the fourth quarter of 2014. The decrease was primarily due to the payment of $88.4 million (net of cash acquired), for the purchase of Wireless Maingate AB and higher working capital requirements in the quarter. SWIR’s cash is building up. Company has no debt, so this shows that its building a bit of muscle to continue it’s acquisition ways.

  3. Completed acquisition of Wireless Maingate which they think will add significant strengths to their device to cloud solutions offerings. SWIR is integrating their solutions with its own AirVantage solution.

  4. OEM Business Solutions
    o Revenue was $133M, up 25% with respect to Q1 2014. So, once again, we see OEM solutions driving the business and its growth. Looking sequentially, we have $116.6M (Q2), $124.3M (Q3), and $129.5M (Q4). Last quarter I had flagged a bit of slowdown in this business segment. Q2 versus Q3 was 6.7% growth, while Q3 versus Q4 was 4.1%, and now Q4 14 versus Q1 15 was 2.7%. It looks like organic growth in this segment is probably slowing down, and they are looking to acquisitions to drive the next phase of growth. It’s not yet a “red” flag for me but I will give this a “yellow” flag. Its understandable that they can’t always show torrid growth but they should be able to keep the machine chugging at about 3 to 5% pace sequentially.

o Broad-based growth with networking (2G to 3G to LTE transition), automotive, PoS, and transportation driving sales.

o A design win with an European home gateway provider was flagged, and it was suggested that LTE might be a viable home broadband alternative even in some developed markets.

o Smart metering wins in Europe.

o Philips Lighting selected for street lighting in LA; Philips uses SWIR’s module for cellular communication.

  1. Enterprise Solutions
    o Revenues grew to $17.4M, which was up 16% over Q1 2014. This included a partial contribution from Wireless Maingate acquisition. Revenue from Enterprise Solutions was $19.5 million in Q4 2014, up 16.4% compared to $16.8 million in Q4 2013. Revenue from Enterprise Solutions was $19.0 million in Q3 2014, up 15.4% compared to $16.4 million in Q3 2013. This segment contributed $18.2M in Q2 2014.

o Sequentially, the growth rates were 2.6% b/w Q3 and Q4, 4.3% b/w Q2 and Q3, and it was down sequential this quarter with respect to Q4. So, this is actually not good, as this segment of the business is the one with higher margins! What did management have to say about this?

  • Comment 1: Seasonally weaker!

  • Comment 2: “This segment is currently performing below their expectation."

  • Comment 3: They expect to see improvements later in the year and they are making some investments in sales & marketing.

  • It looks like their legacy business is suffering:
    The year-over-year increase was driven by revenue contribution from the acquired Maingate and In Motion businesses partially offset by lower demand from legacy enterprise products. We are expecting sequential improvement in our legacy products in Q2 as well as for the remainder of the year.

o Secured new customer wins in public safety, industrial automation, and utility sectors.

o Seems like Wireless Maingate is a critical acquisition and they are hoping to see this provide significant benefits in the enterprise solutions segment.

  1. Q2 2015 Guidance
    SWIR sold off after earnings release, possibly because the guidance can be considered to be light. That alone might not have been an issue for the observant followers, after all SWIR low balls guidance and then beat its (!), however, the weaknesses in the legacy business might be one reason for the sell off.

o Revenue of $153 - $156M. Expect sequential growth in both segments, and they noted that RF components are supply side constrained at this time. At mid-point this represents about a 14% growth.

o Non-GAAP EPS b/w $0.21 and $0.24, or about $0.225 at the mid-point, so effectively flat with respect to Q1 2015.

  1. Accel Networks Acquisition (from the Q1 2015 presentation)

o Provider of secure, managed 4G LTE connectivity services; this is suppose to be replacement for T1/DSL services; the connectivity service can also be used as a backup or setup for temporary seasonal business.
o Small company with 28 employees
o More than 300 enterprise and SME customers in the U.S. serving over 5,000 locations
o $9.3M cash acquisition
o Accel is a managed service provider. They resell 4G from network operators, but with an added layer of application-specific solution, i.e., they manage, monitor, and service the link provided to the end user, such as a retail PoS unit etc.
o Strategically good fit because of strong fit with their device to cloud strategy; brings in 4G LTE connectivity services; strong client base and there might be some cross selling opportunities.

Some pointers from the conference call

  1. Shortage of RF components such as filters and duplexers were highlighted. This can contributed to increased CoS and also to sales delays, and this trend is expected to continue into Q2 2015.

  2. What were/are the growth drivers for the OEM solutions business?
    One was that sales of embedded modules to networking equipment manufacturers such as CISCO was up significantly. Automotive also did well with large companies like Toyota driving the sales. The usage based insurance segment also did well. Jason indicated that their strength in 4G modules will help them stay ahead of industry growth rates, and they expect significant revenues from their design wins in recent past, which should drive revenues for the next 18 - 24 months.

  3. With respect to the Accel, they their thinking seems to be that the Accel business can be grown, using their sales team and their current leads. I.e., leverage their current ‘marketing activities’. Right now, they are not necessarily thinking about platform integrations b/w Accel and their legacy platforms. The thing to note is that Accel currently sells either a CISCO, Craddlepoint, or a Sierra AirLink gateway along with its solution. It’s not that they will try to push for all gateways to be AirLink but the point noted was that even CISCO has Sierra module in it. Accel is expected to remain hardware agnostic. The good thing with Accel is that their revenues are recurring subscriptions.

  4. With respect to lumpiness in R&D spending it was noted that most of the lumpiness is because of ‘certification costs’ of new products.

  5. Management continues to guide for 10 - 15% organic growth.The remainder is suppose to come through acquisitions. They have struck with this sort of guidance and always indicated that they expect to grow at this rate and generally be a few points ahead of the market growth rates. That said, they note that they are bullish with respect to Q3 and Q4 but the comps are though because they had great Q3 & Q4 in 2014.

Some sketchy valuation
TTM revenue: 150 (Q1 15) + 149.0 (Q4 14) + 143.3 (Q3 14)+ 135 (Q2 14) = $577M
TTM EPS (non-GAAP): 0.22 + 0.29 + 0.24 + 0.08 = $0.83 (versus $0.26 a year ago)

SWIR closed at $34, down some 7% following the earnings release. This is similar to what happened with the release of Q4 2014; SWIR closed at $32.88 on Feb 6, 2014, down 12% following the earnings report, most likely because the guidance came in light. Following the Q4 release, I had trailing PE sitting at 52, which has now compressed down to 41. Also note that following Q3 2014 release, when I wrote the analysis, I had PE @ 72.6 and PS @ 1.94. So, PE has dropped because of the potential slowdown in growth.

Now, here’s the interesting bit. If we believe in the Sierra growth story, then taking the forward guidance into consideration, we see the forward EPS looking out to Q2 2015 at $0.98; here I ‘m just using the guidance at mid-point. Then, today’s $34 stock price puts the company on a forward PE (for Q2 2015) at 35.

Concluding Thoughts

Sierra had another good quarter, and it seems like much is happening under the hoods. The company seems to be a serial acquirer, and its growth strategy is hinged on making good acquisitions. Note that they expect to get about 10-15% organic growth and the remainder via acquisitions. So far, it seems their acquisitions have done well. InMotion is contributing, Wireless Maingate contributed some to the bottomline, but we need to keep an eye on what will be happening going forward. This is certainly one of the risks of the company.

The company is trying to accelerate the enterprise solutions side of the business. That makes sense as that side has higher margins. They are using acquisitions to drive the growth. Right now though, it appears that enterprise solutions is still pretty small and it’s not growing as fast as they would like it to grow. It could be Accel will add some zing to the business. Accel is a company they have partnered with in the past, and it seems they think the Sierra sales force can really scale the Accel business. That’s to be seen, but at least these guys are paying for everything using cash, they generate enough cash and have no debt, and they seem to be gunning for higher margin, recurring revenues.

Last quarter (Q4 2014), I had noted that a high 50’s PE looked expensive. From what I understand, I expect Sierra & CalAmp to be able to grow revenues at about 20% rate over a 5-year window, and expect the earnings to grow around the 25-30% range, assuming there’s some operational leverage in the business. At 35x next quarters trailing PE, I think the stock is looking fairly priced.

What about the moat? Sierra’s TTM revenue is around $570M, so it’s becoming a significant operator in the IoT space. Sierra has done well in the OEM side,with modules sold to many big players (CISCO, Phillips, Toyota, Chrysler etc) so may be good execution and good products/solutions will keep them going, but then this doesn’t look seem to be a solid moat. Execution is the key here. IoT is evolving fast and I would like to see them getting more out of enterprise solutions.

Right now, I plan to continue holding Sierra and watch the execution. I ‘m looking to opportunistically write covered calls on a portion of my holdings. I had done that in Q4 2014, which worked well, and seeing that there is some projected weakness for Q2 2015, I might write calls around the $40 strike if I can get an opportunity to do so. If I didn’t have a position, I would look to start some now. It’s a two time David Gardner recommendation, and the recommendations have done well. I might consider writing some $30 puts if the premiums look good, i.e., they give a start price around $27 or so, because at 27 - 28 times earnings Sierra would be a vey good buy given what we know about its business progress.


Right now though, it appears that enterprise solutions is still pretty small and it’s not growing as fast as they would like it to grow.

Thanks for the notes, Anirban. I own some SWIR but am hesitant to add on this dip due to the above factor. I’m concerned that there is a reason beyond “better execution” that this segment isn’t performing as they’d like and they seem to be citing some fluffy reasons for the lack of better performance (seasonally weaker, blah, blah, blah). If they simply become a OEM business, they’re likely to get commoditized over time IMO.

Still holding, but I won’t add any more until I see improvement here. Any thoughts to help alleviate my concerns? Thanks in advance.



Hi Jason,

Good point, and its a concern I share. My guess is that the ‘enterprise’ segment will grow in fits and spurts in the near-term as the market and business models are still in the early formative stages. It would be great if they could propel this further but I don’t think it will happen at a pace greater than 20% in the near-term.

However, as I noted in the post, I 'm starting to think that Sierra does have some form of staying power. Its TTM revenue is around $570M, its an IoT pure play, so I would say its becoming a significant operator in the IoT space. Sierra has done well in the OEM side,with modules sold to many big players (CISCO, Phillips, Toyota, Chrysler etc). Yes, there’s the commoditisation risk but this is still a ‘new’ domain, so the commoditisation I would think is still some ways out. That’s the way I think about this.

At sub-$30’s price point though, this does look like a good point to add. I would add that I think they tend to do well in Q3 & Q4, and I also believe management loves to give low ball guidance. The valuation for their stated above market growth rate ambitions (I read that as 25-30% eps growth) is pretty good today.

All said, though, sizing the position would be a critical. I probably have way too much exposure for a volatile company and industry such as this. If I didn’t have an above average exposure I would be writing puts on it.


Long SWIR, short SWIR puts


At sub-$30’s price point though, this does look like a good point to add. I would add that I think they tend to do well in Q3 & Q4, and I also believe management loves to give low ball guidance. The valuation for their stated above market growth rate ambitions (I read that as 25-30% eps growth) is pretty good today.

Thanks for the response Anirban. I agree that at sub $30, the valuation looks as good as it’s ever been since they became a pure play in IoT. I’m still not sure that that alone makes me want to add to my position until I see the enterprise business performing to expectations. You certainly make a compelling case on the bull side.

Again, I appreciate the response!


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Yup I’m long on SWIR too. Either it will go all the way and be the next CISCO or it will get acquired along the way at a premium take out.