Scott W. Searle, CFA, (646) 616-2782 ssearle@roth.com Sales (800) 933-6830, Trading (800) 933-6820 COMPANY NOTE EQUITY RESEARCH August 03, 2018 Technology: Communications, Wireless & IoT Sierra Wireless, Inc. SWIR - $16.20 - NASDAQ Buy Company Update Estimates Changed, Target Price Changed Stock Data 52-Week Low - High $15.10 - $30.05 Shares Out. (mil) 36.10 Mkt. Cap.(mil) $584.7 3-Mo. Avg. Vol. 243,588 12-Mo.Price Target $23.00 Cash (mil) $73.6 Tot. Debt (mil) $38.6 Est. 3Yr. EPS Growth 12% Note: EPS are fully diluted and pro forma adjusted for stock comp, amortization of intangibles and one-time items. EPS $ Yr Dec 2017 2018E 2019E Curr Prev Curr Prev 1Q 0.24A 0.09A 0.09A 0.20E 0.23E 2Q 0.30A 0.27A 0.20E 0.28E 0.29E 3Q 0.24A 0.25E 0.23E 0.33E 0.33E 4Q 0.28A 0.33E 0.36E 0.45E 0.45E YEAR 1.05A 0.93E 0.88E 1.26E 1.22E P/E 15.4x 17.4x 18.4x 12.9x 13.3x Revenue ($ millions) Yr Dec 2017 2018E 2019E Curr Prev Curr Prev 1Q 161.8A 186.9A 186.9A 199.2E 196.8E 2Q 173.5A 201.9A 196.8E 210.6E 206.8E 3Q 173.2A 201.8E 196.2E 213.8E 210.4E 4Q 183.5A 211.6E 210.1E 233.9E 230.5E YEAR 692.1A 802.1E 790.0E 857.6E 844.5E 2.5 2.0 1.5 1.0 0.5 0.0 Vol (m) SWIR One-Year Price and Volume History Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 30.00 25.00 20.00 15.00 10.00 Price SWIR: 2Q18 Upside, Outlook and Buyback Should Alleviate Concerns SWIR produced a 2Q18 slight beat and raise on OEM Solutions upside and strength in Enterprise and Cloud. GMs continue to improve (adjusted for a onetime benefits), the company continues to make op-ex progress and announced a buyback. With 2H18 auto wins ramping, new product cycles (FirstNet) and general IoT and cloud strength, the company is well positioned for the coming wave of connected devices. We are raising our estimates and price target to $23. Buy. 2Q18 beat driven by OEM Solutions: Last night, Sierra Wireless reported 2Q18 sales and EPS ($201.9M, up 16.4% y/y, and $0.27) above guidance and consensus. The upside was driven by OEM Solutions, 75% of sales, up 4.4% y/y and 11.6% seq, as component issues that clipped $5-6M in 1Q18 sales, abated. Enterprise Solutions were slightly below expectations, $28.4M, up 31% y/y and down slightly seq, after robust 2H17 and 1Q18 results driven by ELD mandates. Similarly, IoT Services was below our expectations at $22.6M (flattish seq) as the company takes continued integration steps with Numerex. Despite these mix issues, GMs were ahead of expectations at 34.4%, but reflected a one-time benefit of $1.2M in OEM Solutions or roughly 60bp and a 3 cent impact. Op-ex remained well controlled producing pro forma EPS of $0.27, 7 cents ahead of estimates. FCF generated in the quarter was $5.7M and cash balances stood at $73.6M. The company also authorized up to a 10% buyback (each 1% adds ~$0.01 EPS). We highlight the following across each business segment OEM Solutions (75% of sales, up 4.4% seq and 11.6% y/y): After being component constrained (1Q18) the segment performed well in the quarter including upside to GMs (adjusted for one-time benefits). New auto design wins are on track to ramp in 2H18 which should produce some GM pressure. New LPWA products (HL78) are targeted to launch in late 2018. Enterprise Solutions (14% of sales, up 31.1% y/y and down seq): After extremely strong 2H17 and 1Q18 results, driven in part by ELD mandates, we believe Enterprise has entered a plateau period. However, new products in public safety (FirstNet), oil & gas and industrial are well positioned to return the unit to growth. Segment leading GMs of 50.5% in the quarter should also benefit from increasing recurring services in the future. Continued... Important Disclosures & Regulation AC Certification(s) are located on page 6 to 8 of this report. Roth Capital Partners, LLC 888 San Clemente Drive Newport Beach CA 92660 949 720 5700 Member FINRA/SIPC
Continued IoT Services (11% of sales, flat seq and up over 2x y/y reflecting the Numerex acquisition): Numerex integration continues with incremental costs expected in the near-term. However, the company unveiled an aggressive strategy to push its device to cloud MVNO strategy which targets embedded solutions and smartsim technology to enable any device (module, gateway, etc) to be carrier ready out of the box. There is more wood to chop, however, we believe modest attach rates to its 17M annual units shipped provides an attractive recurring TAM. Raising estimates and PT; Buy: Given the 2Q results we are raising our estimates with EPS increasing to $0.93 and $1.26 in CY18/19, respectively, from our prior $0.88 and $1.22. Overall, we believe the ramp of new OEM wins, continued growth in Enterprise solutions, and the general increasing demand for IoT to drive an improving outlook and growth curve. Additionally, we believe 2Q18 results should go a long way to alleviating concerns related to the abrupt CEO transition (Note: the company hopes to have a new CEO in position by 4Q18). We maintain our Buy rating and raise our price target to $23 or ~18x our revised CY19E EPS. Additionally, we highlight our Telit Auto sales driven break-up valuation (7/19/18) which supports a mid to high $20 s valuation. Buy. Figure 1: Sierra Wireless Break Up Valuation Analysis CAGR Sum of the Parts Sales Model 2015 2016 2017 2018E 2019E 15-17 17-19E Multiple Per Shr Revenue Mix OEM Solutions 523.4 516.6 555.9 593.8 622.6 3.1% 5.8% 1.0x $17.08 Enterprise Solutions 63.1 71.5 101.5 114.1 124.2 26.9% 10.6% 1.5x $5.11 IoT Services 21.4 27.6 34.7 94.2 110.8 27.4% 17.6% * 2.0x $6.08 Total 607.8 615.7 692.1 802.1 857.6 6.7% 11.3% $28.26 * 2019 vs 2018 growth Source: SEC filings, company reports and ROTH Capital Partners Figure 2: Sierra Wireless Valuation Comps 8/1/18 CY201CY201CY2019CY201CY201CY2019 % O ff Share Market Ent EV / Sales P / E Sales % Chg 52 Wk Rating Price Cap Value 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E High S WIR Buy $15.70 $575 $546 0.8x 0.7x 0.6x 15.0x 16.9x 12.5x 12% 16% 7% 48% ALRM Buy* $43.40 $2,053 $2,026 6.1x 5.3x 4.7x 49.4x 37.7x 31.9x 31% 15% 12% 12% CAM P Buy $22.73 $802 $779 2.1x 2.0x 1.9x 19.9x 18.6x 16.1x 7% 6% 7% 11% DGII Buy $13.20 $358 $304 1.6x 1.3x 1.2x 66.4x 170.3x NM (3%) 19% 9% 10% ITI NC $4.89 $163 $147 1.5x 1.4x 1.3x NM NM NM NA 5% 11% 40% INSG NC $1.90 $114 $232 1.1x 1.2x 1.1x NM NM 21.9x (12%) (13%) 11% 18% ORBC Buy $9.48 $743 $951 3.8x 3.2x 2.9x NM NM 214.0x 32% 18% 10% 21% USAT NC $13.75 $813 $833 7.0x 5.4x 4.3x 358.7x 128.5x 71.6x 35% 30% 23% 12% * Covered by Darren Aftahi Group Average 3.3x 2.8x 2.5x NA 88.8x 71.1x 15% 11% 12% 18% Source: ThomsonReuters Eikon, SEC filings, company reports and ROTH Capital Page 2 of 8
VALUATION Post the Numerex acquisition, SWIR shares are down ~45%. At current levels, we believe that dilution and investors' concerns related to Numerex are largely discounted. At 0.7x EV/CY18E sales, shares of SWIR remain discounted to the comp group of 1-3x. Our price target of $23 reflects 18x CY19E EPS or ~1.0x EV/ CY1E sales, still a discount to peers given the near-term integration issues with Numerex. Factors that might impede our price target include gross margin below our expectations due to the competitive nature of the industry including new LPWA solutions, slower adoption and growth of cellular modules, more aggressive pricing for LTE Cat M1 and NB IoT solutions, and issues related to the expected integration and growth of Numerex. RISKS Modules and Competition: Modules are commodity-like items with ~30% gross margins. Additionally the competitive landscape is aggressive with a dozen plus suppliers including Chinese vendors such as Huawei, SIMcomm and Quectel. However, module and embedded systems do maintain differentiated aspects, typically provided through firmware and software, such as the emerging electronic SIM. SWIR also maintains industry leading scale at ~30% market share. LTE Cat M1 and NB IoT could bring margin pressure. While LTE Cat M1 and NB IoT should expand the unit opportunity for OEM modules and embedded solutions, it could also bring lower ASPs and less ability to differentiate solutions, in our opinion. We note that current module prices average mid-teens (with a range of sub $10 for GSM to >$30 for higher end LTE solutions). With the advent of Cat M1 and NB1 the blended mix for modules will likely decline given the anticipated entry point of ~$10 modules (in-line with GSM). We do not believe this will not become relevant until 2019, at the earliest, and unit volumes should more than offset ASP pressure. Numerex: Numerex entails multiple risks including the lack of growth, platform integration and the conversion of 2G subs. That said, we believe the scale and end market solution additions gained by Numerex make this transaction attractive in the intermediate-to-long-term. Near-term the company is incurring greater opex costs to integrate the solution and upgrade the platform. OEM Business has muted growth: Sierra s OEM business has been relatively stagnant for the past two years, posting only a 3% CAGR, yet comprises three-quarters of sales, including Numerex. However, the pipeline of wins in long-lead-time businesses such as auto has been building and should start to produce revenue in 2H18 and 2019 in key verticals such as Autos (recent wins and expansion with Volkswagen and others). Higher value enterprise and cloud represents slightly greater than 25% of the mix including Numerex: Blended gross margins from enterprise and cloud are ~50% with operating profitability approximately onethird of the mix despite being only 25% of the mix. Despite being the most attractive elements of the business, it should remain a minority contributor to overall sales as SWIR remains and embedded systems and module business. COMPANY DESCRIPTION Sierra Wireless is a leading supplier of embedded systems and wireless modules for the cellular and IoT market with approx 30% market share. With a complete suite of hardware, software and platform solutions, Sierra Wireless offers a complete device-to-cloud product offering for customers. Page 3 of 8
Sierra Wireless, Inc. Fiscal Year Ends December Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Income Statement 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2015 2016 2017 2018E 2019E Revenue 161.8 173.5 173.2 183.5 186.9 201.9 201.8 211.6 199.2 210.6 213.8 233.9 607.8 615.6 692.1 802.1 857.6 COGS 106.0 113.7 115.3 121.6 124.5 132.5 133.9 140.5 132.5 139.5 139.8 151.8 413.3 410.4 456.6 531.4 563.6 Gross Profit 55.8 59.8 57.9 61.9 62.4 69.4 67.9 71.1 66.8 71.2 74.0 82.1 194.5 205.2 235.4 270.7 294.0 R&D 18.9 18.2 17.4 19.7 23.9 23.8 23.5 23.5 23.5 23.8 24.3 25.5 72.6 71.6 74.2 94.8 97.1 S&M 17.6 19.9 20.8 21.1 21.7 21.4 21.1 21.1 21.1 21.3 21.8 23.1 52.0 62.5 79.5 85.2 87.2 G&A 9.0 9.2 9.1 9.9 11.0 12.1 12.0 12.0 12.0 12.1 12.1 12.3 35.6 36.8 37.2 47.0 48.5 Operating Income 10.2 12.5 10.6 11.3 5.8 12.1 11.3 14.6 10.2 14.0 15.8 21.2 34.3 34.3 44.6 43.8 61.1 Amortization 6.0 7.4 7.9 9.1 8.0 10.2 10.2 10.2 10.2 10.2 10.2 10.2 21.3 25.2 30.3 38.5 40.7 Non-recurring Costs 4.5 1.1 2.5 5.0 5.4 7.1 0.0 0.0 0.0 0.0 0.0 0.0 2.9 1.8 13.1 12.5 0.0 Operating Income (repor (0.3) 4.0 0.2 (2.8) (7.6) (5.1) 1.2 4.4 0.1 3.8 5.6 11.0 10.1 7.4 1.2 (7.2) 20.5 Net Interest 0.0 (0.0) 0.0 0.0 0.0 (4.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 (4.0) 0.0 Other 1.1 3.5 1.7 1.3 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (11.8) (1.7) 7.6 1.2 0.0 EBT 0.9 7.5 1.9 (1.5) (6.4) (9.2) 1.2 4.4 0.1 3.8 5.6 11.0 (1.6) 5.7 8.8 (10.0) 20.5 Income Tax (0.2) 0.7 0.7 1.9 (0.3) 2.3 0.1 0.3 0.0 0.6 0.8 1.7 1.1 4.3 3.1 2.4 3.1 Net Income 1.0 6.8 1.2 (3.4) (6.1) (11.5) 1.1 4.1 0.0 3.2 4.8 9.4 (2.7) 1.4 5.7 (12.4) 17.4 Share (Basic) 31.9 32.2 32.2 33.1 35.9 36.0 36.0 36.2 36.2 36.4 36.5 36.7 32.2 32.0 32.4 36.0 36.5 Shares (FD) 31.9 32.8 32.7 33.1 36.6 36.0 36.0 36.2 36.2 36.4 36.5 36.7 32.5 32.3 32.6 36.2 36.5 EPS (Basic) - GAAP $0.03 $0.21 $0.04 ($0.10) ($0.17) ($0.32) $0.03 $0.11 $0.00 $0.09 $0.13 $0.25 ($0.08) $0.48 $0.14 ($0.34) $0.48 Pro Forma EPS (FD) $0.24 $0.30 $0.24 $0.28 $0.09 $0.27 $0.25 $0.33 $0.20 $0.28 $0.33 $0.45 $0.57 $0.68 $1.05 $0.93 $1.26 % of Sales Gross Margin 34.5% 34.5% 33.4% 33.8% 33.4% 34.4% 33.6% 33.6% 33.5% 33.8% 34.6% 35.1% 32.0% 33.3% 34.0% 33.8% 34.3% R&D 11.7% 10.5% 10.1% 10.7% 12.8% 11.8% 11.7% 11.1% 11.8% 11.3% 11.4% 10.9% 11.9% 11.6% 10.7% 11.8% 11.3% G&A 5.6% 5.3% 5.2% 5.4% 5.9% 6.0% 5.9% 5.7% 6.0% 5.7% 5.7% 5.3% 5.9% 6.0% 5.4% 5.9% 5.7% Op Inc (normalized) 6.3% 7.2% 6.1% 6.2% 3.1% 6.0% 5.6% 6.9% 5.1% 6.6% 7.4% 9.1% 5.6% 5.6% 6.4% 5.5% 7.1% Net Inc 0.6% 3.9% 0.7% (1.8%) (3.2%) (5.7%) 0.5% 1.9% 0.0% 1.5% 2.2% 4.0% (0.4%) 0.2% 0.8% (1.5%) 2.0% % Change Revenue 13.3% 11.1% 12.8% 12.6% 15.5% 16.4% 16.5% 15.3% 6.6% 4.3% 6.0% 10.6% 10.8% 1.3% 12.4% 15.9% 6.9% Op Inc 103.0% 23.9% 70.0% (12.7%) (43.1%) (3.1%) 6.8% 29.0% 76.2% 15.2% 39.2% 45.4% 96.0% (0.0%) 30.0% (1.8%) 39.5% EPS 200.0% 50.0% 84.6% 2.3% (62.5%) (10.0%) 2.1% 16.4% 119.5% 5.4% 32.8% 37.5% (2439.6%) 18.6% 54.4% (11.3%) 35.1% Source: SEC filings, company reports and ROTH Capital Partners Scott W Searle, CFA ssearle@roth.com (646) 616-2782 Page 4 of 8
Sierra Wireless, Inc. FY Ends December Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Sales Model 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2015 2016 2017 2018E 2019E Revenue Mix OEM Solutions 133.0 144.6 138.5 139.8 135.2 150.9 150.2 157.5 147.6 155.3 153.6 166.1 523.4 516.6 555.9 593.8 622.6 Enterprise Solutions 21.7 21.7 26.3 31.9 29.2 28.4 27.9 28.6 27.2 29.1 32.0 36.0 63.1 71.5 101.5 114.1 124.2 IoT Services 7.1 7.3 8.4 11.9 22.5 22.6 23.7 25.5 24.4 26.3 28.3 31.8 21.4 27.6 34.7 94.2 110.8 Total 161.8 173.5 173.2 183.5 186.9 201.9 201.8 211.6 199.2 210.6 213.8 233.9 607.8 615.7 692.1 802.1 857.6 Revenue Mix OEM Solutions 82% 83% 80% 76% 72% 75% 74% 74% 74% 74% 72% 71% 86% 84% 80% 74% 73% Enterprise Solutions 13% 12% 15% 17% 16% 14% 14% 14% 14% 14% 15% 15% 10% 12% 15% 14% 14% IoT Services 4% 4% 5% 6% 12% 11% 12% 12% 12% 12% 13% 14% 4% 4% 5% 12% 13% % Change (y/y) OEM Solutions 10.0% 9.0% 8.3% 3.4% 1.7% 4.4% 8.4% 12.7% 9.2% 2.9% 2.3% 5.5% 50.8% (1.3%) 7.6% 6.8% 4.8% Enterprise Solutions 44.8% 30.7% 38.8% 52.0% 34.5% 31.1% 6.2% (10.3%) (7.0%) 2.4% 14.6% 25.8% 20.4% 13.3% 42.0% 12.4% 8.8% IoT Services 2.1% 4.3% 23.0% 73.5% 217.6% 209.6% 180.9% 114.7% 8.8% 16.5% 19.3% 24.8% 29.2% 25.5% 171.8% 17.6% Total 13.3% 11.1% 12.7% 12.6% 15.5% 16.4% 16.5% 15.3% 6.6% 4.3% 6.0% 10.6% 52.2% 1.3% 12.4% 15.9% 6.9% % Change (seq) OEM Solutions (1.6%) 8.7% (4.2%) 0.9% (3.3%) 11.6% (0.5%) 4.9% (6.3%) 5.2% (1.1%) 8.2% Enterprise Solutions 3.5% (0.3%) 21.3% 21.3% (8.4%) (2.7%) (1.8%) 2.5% (5.0%) 7.0% 10.0% 12.5% IoT Services 3.5% 3.0% 15.7% 40.6% 89.5% 0.4% 5.0% 7.5% (4.0%) 7.5% 7.5% 12.5% Total (0.8%) 7.2% (0.2%) 5.9% 1.8% 8.0% (0.1%) 4.9% (5.8%) 5.7% 1.5% 9.4% Source: SEC filings, company reports and ROTH Capital Partners Scott W Searle, CFA ssearle@roth.com (646) 616-2782 Page 5 of 8
Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Disclosures: ROTH makes a market in shares of Sierra Wireless, Inc., Alarm.com Holdings, Inc., CalAmp Corp., Digi International, Inc. and ORBCOMM, Inc. and as such, buys and sells from customers on a principal basis. Within the last twelve months, ROTH has received compensation for investment banking services from CalAmp Corp.. Page 6 of 8
Each box on the Rating and Price Target History chart above represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first note written during the past three years. Distribution Ratings/IB Services shows the number of companies in each rating category from which Roth or an affiliate received compensation for investment banking services in the past 12 month. Page 7 of 8
Distribution of IB Services Firmwide IB Serv./Past 12 Mos. as of 08/03/18 Rating Count Percent Count Percent Buy [B] 260 72.42 139 53.46 Neutral [N] 49 13.65 27 55.10 Sell [S] 5 1.39 2 40.00 Under Review [UR] 43 11.98 23 53.49 Our rating system attempts to incorporate industry, company and/or overall market risk and volatility. Consequently, at any given point in time, our investment rating on a stock and its implied price movement may not correspond to the stated 12- month price target. Ratings System Definitions - ROTH employs a rating system based on the following: Buy: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return of at least 10% over the next 12 months. Neutral: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return between negative 10% and 10% over the next 12 months. Sell: A rating, which at the time it is instituted and or reiterated, that indicates an expectation that the price will depreciate by more than 10% over the next 12 months. Under Review [UR]: A rating, which at the time it is instituted and or reiterated, indicates the temporary removal of the prior rating, price target and estimates for the security. Prior rating, price target and estimates should no longer be relied upon for UR-rated securities. Not Covered [NC]: ROTH does not publish research or have an opinion about this security. ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months. The material, information and facts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used as a complete analysis of the company, industry or security discussed in the report. Additional information is available upon request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report are subject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a high degree of risk and may not be suitable for all investors. No part of this report may be reproduced in any form without the express written permission of ROTH. Copyright 2018. Member: FINRA/SIPC. Page 8 of 8