SWIR reports strong Q3 2014, and strong outlook

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Hi all,

As I have significant exposure to the Internet of Things space via CAMP and SWIR, I try to follow them as closely as I possibly can. I found sometime today to review the earnings release, conference call, and presentation. Sharing my notes here.

Bottomline, what a wonderful quarter! The growth was broad based, especially in the OEM segment. The operating leverage in the business came through nicely in the quarter. Q3 Revenue came in at $143.3M, a 27% YoY increase over Q3 2013, with Non-GAAP earnings from operations coming in at $8.4 million, an increase of 249% compared to $2.4 million in Q3 2013. Of course the market loved it and the stock closed some 15% up in After Hours trading. Let’s see how it holds tomorrow.

Management didn’t want to call out an increased growth rate for future quarters stating that they would like to set organic growth rate expectation around the 15% mark because its still not clear if the increased growth is here to stay. I 'm not sure if the analysts are going to buy this argument. We will have to see how analysts model for future quarters.

On a trailing basis, SWIR looks expensive. However, if we look couple quarters ahead and assume that they can get about 10% eps growth sequentially, then the forward PE is not all that high. I have a sketchy valuation below in my notes.

Anirban.

Press Release: http://www.sierrawireless.com/AboutUs/investorinformation/~/…

Presentation: http://www.sierrawireless.com/AboutUs/investorinformation/~/…

Webcast: http://www.snwebcastcenter.com/webcast/sierrawireless/2014q3…

Highlights

  1. Q3 Revenue was $143.3M, a 27% YoY increase over Q3 2013. Note that Q2 2014 revenue was $135 million, which represented a 23% growth over Q2 2013. So, another record figure and indication of growth accelerating.

  2. Non-GAAP earnings from operations of $8.4 million, an increase of 249% compared to $2.4 million in Q3 2013. Note that Non-GAAP earnings from operations increased 149% YoY in Q2 2014 to $3.7 million. More confirmation of acceleration in growth and the operating leverage of the business.

  3. Non-GAAP EPS of $0.24 compared to $0.11 in Q3 2013. Recall that non-GAAP EPS was $0.08 in Q2 2014 versus $0.03 in Q2 2013. That’s some solid increase in earnings. Now, note that SWIR had Q3 2014 Guidance @ Mid-point:
    Revenue of $137.5 M
    Non-GAAP EPS of $0.135,
    so this is a solid beat. The market loved the results and we saw a serious pop in AH trading.

  4. Overall, non-GAAP gross margin was 32.9%. They generated a fair amount of free cash flow ($26.4M). Cash and cash equivalents at the end of Q3 2014 were $196.1 million, representing an increase of $27.7 million compared to the end of the second quarter of 2014. SWIR is building up a solid cash balance. Note that SWIR is debt free. Acquisitions in the pipeline? “Strategic acquisitions” was dropped a few times in the call by both the CEO and the CFO.

  5. OEM Solutions Business

  • Revenue from OEM Solutions was $124.3 million in Q3 2014, up 29.7% compared to $95.9 million in Q3 2013. Note that OEM solutions revenue was $116.6M in Q2 2014. So clearly, OEM solutions drove the growth.
  • They continue to see strong growth in 3G & 4G LTE embedded modules.
  • Revenues were broad based covering various verticals.
  • They had design wins in automative, energy, telematics, and mobile computing areas
  • Talked about the win with Itron in the area of smart grids
  • Talked about Opta Telematics in the Insurance Telematics area; insurance telematics growing nicely and gaining traction in Europe as well. This is something CalAMP has been talking about.
  • Non-GAAP gross margin improved to 29.8%
  1. Enterprise Solutions Business
  • Revenue from Enterprise Solutions was $19.0 million in Q3 2014, up 15.4% compared to $16.4 million in Q3 2013. Note that this segment contributed $18.4M in Q2 2014, so not much sequential growth here.
  • In-Motion integration is complete and this quarter had strong contribution from In-Motion. The enterprise solutions team is now significantly larger and they believe they should be able to leverage the bigger team. I think this is good as the enterprise business has significantly higher margin than the OEM business. Any increases here will have a favourable impact on the bottomline.
  • Non-GAAP gross margin of 53.8% (better than Q2 driven by favourable product mix)
  • They believe they have strong growth opportunity in public safety, utility, and regional transit markets.
  • Air Vantage M2M customer base strong and growing.
  1. Some sketchy valuation
    TTM revenue: 143.3 (Q3 14)+ 135 (Q2 14) + 121.1 (Q1 14) + 118.7 (Q4 13) = $518.1M
    TTM EPS (non-GAAP): 0.24 + 0.08 + 0.02 + 0.10 = $0.44
    Stock price (AH close @ 11/5/2014): $31.95
    PS: 1.94
    PE: 72.6

Management has guided Q4 2014 for non-GAAP EPS b/w $0.25 and $0.28. Assume mid-point of $0.265. So that looks more like a 10% sequential growth. May be management is sandbagging this time as well. However, if we use their guidance and assume we get another 10% sequential increase in earnings in Q1 15, the forward non-GAAP EPS would be around $0.88. That puts it on a more reasonable forward PE two quarters out of 36. Looks reasonable to me.

Additional notes from the conference call

There was a question about organic growth, in particular whether or not management expects organic growth to be more than the stated rate of 10 to 15% organic growth, because they have been hitting the high end of the organic growth rate and even exceed that rate. They think in the mid-term the expectation is 10-15% rate. They do expect to grow the enterprise solutions business in the 25% range over the long-term. There were many questions around this, and management essentially said that they want to stay conservative because they are still not at the point where they can safely say whether the expanded growth rates are just for a few quarters or indicative of more longer-term trends.

What is really driving this stupendous growth? It’s broad based. OEM solutions has been the driver but the drivers are pretty broad based. Jason (CEO) noted that technology shift in the market from 2G to 3G/4G has fuelled the growth. Their claim is that SWIR is ahead in the 3G/4G technology and thus able to out-execute their competitors.

What is the value of the design wins in Q3 2014 versus Q3 2013? From a design win point, Jason noted that Q3 2014 design win was significant, in terms of count as well as a design win lifetime value standpoint. Talking about the future quarters, they noted that they expect to continue to improve margins through cost improvements and product mix. They noted that margins should sequentially improve in Q4 2014. Management believes that they can achieve about 35% gross margin in the next few years, driven by stronger growth in enterprise segment, product mix, and cost control. This all sounds great!

Jason noted that they have been busy in the M&A space. They are confident of making announcements soon!

What’s going on at Europe? Europe was up YoY and sequentially. They are cautiously optimistic and may be Europe has hit “bottom”. They feel good about Europe but don’t expect significant changes in the near-term.

Pricing is most competitive when selling to volume buyers (e.g., 1 million units range). These are the automotive, payments verticals.

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