SWIR reports strong Q4 but weak Q1 guidance

Hi all,

Below are my notes for Q4 2014.


Press release:http://www.sierrawireless.com/~/media/pdf/investors/2014/201…

Presentation: http://www.sierrawireless.com/~/media/pdf/investors/2014/q4-…

Webcast: http://www.snwebcastcenter.com/webcast/sierrawireless/2014q4…

Transcript: http://seekingalpha.com/article/2891986-sierra-wireless-swir…


  1. 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.

  2. Non-GAAP earnings from operations of $10.0 million compared to $2.6 million in Q4 2013. That’s a 285% YoY increase. For comparison, note that Non-GAAP earnings from operations in Q3 2014 was $8.4 million, an increase of 249% compared to $2.4 million in Q3 2013. Earnings growth has been solid.

  3. Non-GAAP EPS of $0.29 compared to $0.10 in Q4 2013. SWIR seems to be developing a history of providing conservative guidance. In Q3 2014, they had guided Q4 for

  • revenue of $145 - $148M
  • earnings from operation of $9M to $10M
  • non-GAAP eps of $0.25 to $0.28
    So, they either beat on their guidance or at least meet the upper end of their guidance.
  1. Gross margin was 33.6% in the fourth quarter of 2014, compared to 32.5% in the fourth quarter of 2013. Gross margin was 32.9% in Q3 2014, so a tick upwards which is good. These are non-GAAP numbers.

  2. Cash and cash equivalents at the end of 2014 were $207.1 million, representing an increase of $11.0 million
    compared to the end of the third quarter of 2014. Cash generated from operations during the fourth quarter was
    $11.3 million. 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. OEM Business solutions
    o Revenue from OEM Solutions was $129.5 million in Q4 2014, up 27.2%
    compared to $101.8 million in Q4 2013. 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, 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). Now three quarters don’t make a trend, but I notice a bit of slowdown in sequential growth. Q2 versus Q3 was 6.7% growth, while Q3 versus Q4 was 4.1%. Something to watch going forward.

o Growth was broad based, including segments such as automotive, transportation, networking and mobile computing. 3G/4G embedded modules continued to be a driver. Nice, and it’s good as long as they can keep this up. Networks will eventually migrate to 5G networks, while the developed markets move from 4G to 5G, the developing will move from 4G to 5G. So, plenty of opportunity here if you can keep up with the pace.

o Legato embedded software platform is proving to be very beneficial from a time to market standpoint for developers and large OEMs.

o New product development activity was high in Q4, resulting in the January release of our next generation AirLink gateways. The new GX450 mobile gateway and the ES450 enterprise gateway provide support for a broad range of LTE frequency bands, so customers can deploy a single gateway solution across many different regional markets.

  1. Enterprise solutions
    o 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. Sequentially, the growth rates were 2.6% b/w Q3 and Q4, and 4.3% b/w Q2 and Q3.

o In Q4 the company acquired Maingate (a leading European provider of wireless connectivity and data management services for IoT solutions per managements commentary). Management believes this acquisition will give a boast to their cloud offerings. If these acquisitions work, that’s great because the enterprise solutions business has significantly higher margins.

o Wireless Maingate was acquired for $91.6 million (cash), including working capital.

o In-Motion was the key driver in growth. We can see a strategy here. Management is trying to boast this segment via acquisitions; hopefully, they are doing a good job here of finding key accretive acquisitions.

o This segment is seasonally lower in Q1.

  1. Guidance & Some sketchy valuation
    TTM revenue: 149.0 (Q4 14) + 143.3 (Q3 14)+ 135 (Q2 14) + 121.1 (Q1 14) = $548.4M
    TTM EPS (non-GAAP): 0.29 + 0.24 + 0.08 + 0.02 = $0.63 (versus $0.23 in 2013)

SWIR closed at $32.88 on Feb 6, 2014. It was down 12% following the earnings report, most likely because the guidance came in light.
PS: 1.90 (assuming 31.76M outstanding shares)
PE: 52.2
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.

Management is guiding Q1 2015 revenue of $147M, earnings from operations of $6.6M, and non-GAAP EPS of $0.165 ( all at the mid-point). For a growth stock, this is a problem. We are looking at sequential decline on both revenue and non-GAAP eps with this guidance.

Some thoughts from the conference call

Organic growth rates. 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.

Regional dynamics. Europe continues to be slow. They thought that Q3 showed a nice up trend, so they expected to see slow but steady improvement but that didn’t happen. They are optimistic longer-term given the design wins there but right now the drivers are Americas & Asia,

New Products and their impact. The new GX and ES products potentially created a bit of pause in revenue in Q4, which will continue into Q1. So Q1 is facing some seasonality issues + impact from new product launch. They also indicated some supply chain issues with the launch of new products. The supply chain is apparently under pressure with supplying RF components. This might be a god thing in disguise in that pressure in the supply side indicates strong demand and good uptick for IoT.

Shift from 2G to 3G to 4G supporting ASP. There was an interesting question of the revenue mix from selling 2G/3G/4G products to OEMs. This was interesting because the OEM business is the main contributor to the revenues. Jason (CEO) noted that the mix is shifting towards 3G & 4G, which is not surprising and that the shift is helping keep the ASP flat YoY. This is good news because as IoT penetrates deeper, there will be more units sold and holding steady on ASP and margins will be beneficial to the bottomline.

**Competition.**There was a question regarding competition from uBLOX (I hadn’t heard of them). Here’s the direct quote from the conference call.
"I don’t see any significant changes in the ecosystem. uBLOX is been a good competitor. They probably improved a little bit over 2014. I am pretty sure looking at our peer growth numbers that we – our direct peer growth numbers that we grew a little faster or at least kept the pace, in terms of revenue growth.

And I will say anecdotally based on the design wins that we track, we believe that we are gaining design win market share, that we do kind of win loss. Of course, we track our design wins pretty closely and as we look at the design wins we compete forward. We’re willing – we’re winning far more than our market share would imply."

**Enterprise growth rate.**There was a question on enterprise growth rates and why it’s lagging OEM growth rates. Jason indicated that the slow rate was due to a number of factors, including new products/solutions coming online in Q3 & Q4 2013, which created though comparable for 2014. They also think that they need to do more at the sales level to get this segment growing more than it has been growing. He reiterated that this isn’t a market issue, so I take this to mean it’s a company specific issue. This makes sense to me as the business has primarily been driven by OEM solutions, so trying to get the high margin enterprise solutions to take off has been more a work in progress. It’s been happening through acquisitions and through investment in people. Only time will tell if its working but if it does work this will be great for SWIR as this segment has significantly better margins and is potentially providing recurring revenues.

Concluding Thoughts

o The Goods
Well, Q4 2014 was solid FY 2014 was very good for Sierra. The company has cash on the books and is generating healthy free cash flow. Earnings growth was ahead of revenue growth showing the leverage in the business model. I like how they are able to maintain the average selling price on the OEM side. This is happening because of the technology transition from 2G to 3G to 4G and the trend is likely to hold as there are other transitions (e.g., 4G to 5G). The penetration will increase over time, so maintaining ASP and margins overall is great. We also saw margin improvements in 2014.

oThe not so goods
I ‘m not calling these “bad” yet. 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.

The valuation is bit of a worry. Long-term lets say revenue is growing at 20%. Earnings can potentially grow at in the 25% to 30% assuming the business keeps benefitting from scale. At 52x trailing earnings we are paying a fair bit of premium for earnings growth.

What about the moat? Sierra crossed $500M in annual revenue, so it’s becoming a significant operator in the IoT space. Sierra has done well in the OEM side, 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. I ‘m concerned by the weak guidance for Q1 2015.

Right now, I plan to continue holding Sierra and watch the execution. I had covered calls on a third of my position, which are now set to expire for income. I ‘m not adding any to my Sierra position at current prices. It’s already pretty large and it’s one of my bigger positions. Around 40 - 45x earnings might be a good area to write puts. I ‘m thinking about re-upping my covered calls.