Shares of Sierra Wireless (SWIR +0.00%) recently surged after the company's second quarter numbers easily beat analyst expectations. The Internet of Things (IoT) modules and gateway vendor's revenue rose 16% year over year to $201.9 million, beating analysts' consensus expectations by $2.7 million and marking its strongest sales growth in three years.
Sierra's net earnings dipped 1% against the prior-year quarter to $9.7 million, or $0.27 per share, but earnings per share (EPS) still beat estimates by six cents. The company's adjusted EBITDA rose 5% to $15.6 million.
Image source: Getty Images.
Sierra expects its sales to rise 14% to 20% in the current quarter (third quarter of 2018), compared to the consensus estimate of 14% growth. It expects negative 4% to positive 30% EPS growth, compared to an average forecast of 4% earnings growth. Sierra didn't provide any guidance for the full year, but Wall Street expects its sales to rise 15% as its earnings slip 12% this year, followed by 9% revenue growth and 36% earnings growth next year.
Sierra's stock has stumbled more than 20% over the past 12 months, but its solid second quarter report seemingly indicates that the company -- which is often dubbed a "pure play" on the growing IoT market -- might be approaching an inflection point. Let's take a closer look at its second quarter numbers and see if Sierra is ready to soar.
Understanding Sierra's businesses
Sierra Wireless is the world's largest provider of 2G, 3G, and 4G embedded modules and gateways. These products are widely used in machine-to-machine (M2M) communications across the IoT market.
Sierra periodically expands its business by buying smaller wireless players. Its recent acquisitions include AnyData, Maingate, MobiquiThings, GenX Mobile, Numerex, and GlobalTop Technology's GNSS (global navigation satellite system) unit.
Image source: Getty Images.
Sierra splits its business into three main units: OEM (original equipment manufacturer), enterprise, and IoT solutions. OEM revenues accounted for 75% of the company's top line last quarter, while enterprise supplied 14% of total revenue, and IoT revenue accounted for the remaining 11%.
Sierra struggled with a slowdown in OEM spending in previous quarters, which was mostly offset by the growth of its enterprise and IoT units. However, its OEM sales growth accelerated during the second quarter, fueled by rising demand in the automotive, industrial, and enterprise networking markets. Below are the recent year-over-year growth rates for each segment over the last five quarters:
|
Q2 2017 |
Q3 2017 |
Q4 2017 |
Q1 2018 |
Q2 2018 | |
|---|---|---|---|---|---|
|
OEM |
9% |
8.4% |
3.4% |
2.1% |
4.5% |
|
Enterprise |
30.7% |
38.8% |
52.0% |
34.5% |
31.1% |
|
IoT* |
4.3% |
23% |
73.5% |
218% |
209.6% |
|
Total |
11.1% |
12.8% |
12.6% |
15.5% |
16.4% |
Year-over-year revenue growth. Source: Sierra Wireless quarterly reports. *Formerly known as "Cloud and Connectivity Services.
Sierra's triple-digit IoT growth looks impressive, but that figure was significantly inflated by its acquisition of M2M enterprise solutions provider Numerex last December. But during the company's second-quarter earnings conference call, CFO Dave McLennan noted that even after excluding Numerex, Sierra's IoT services "continue to experience solid customer activity with new wins in industrial, energy and transportation."
However, the growth of the organization's higher-margin enterprise unit has been decelerating, even though the unit reported robust demand for its higher-margin AirLink Networking Solutions in the industrial and mobile markets last quarter.
Segment gross margins, and company valuation
Sierra's enterprise unit generally has the highest non-GAAP gross margin (50% last quarter), followed by the IoT (41.1%) and OEM (30.4%) units. The enterprise segment's gross margin expanded 250 basis points last quarter versus the prior-year quarter, but IoT and OEM gross margins fell 150 and 170 basis points, respectively.
As a result, Sierra's total non-GAAP gross margin fell ten basis points to 34.4%. That slight dip was disappointing, but Sierra's declining dependence on OEM revenues and growing business in higher-margin IoT and enterprise areas could bolster the organization's margins over the next few quarters.
Sierra's stock currently trades at 21 times forward one-year earnings, which is significantly higher than its average forward price-to-earnings (PE) ratio over the past year.
SWIR PE Ratio (Forward) data by YCharts
Sierra's forward P/E is also high relative to other IoT-oriented plays like CalAmp, which provides telematics solutions for the automotive and industrial markets, or networking giant Cisco, which offers a wide range of hardware and software for the IoT market.
Wall Street expects CalAmp's revenue and earnings to both rise 6% this year, and its stock trades at 16 times forward earnings. Cisco, which trades at 15 times earnings, is expected to generate 3% sales growth and 8% earnings growth this year.
Wait for a pullback
Sierra's sales growth is accelerating, but much of that growth is inorganic (i.e. acquired), and its margin expansion is unbalanced. The stock also isn't cheap relative to either its earnings growth potential or its IoT peers. Sierra might still be a great long-term play on the IoT market, but I think investors should wait for a pullback before pulling the trigger.
