There's no mistaking that 2014 was a fantastic year for Sierra Wireless (NASDAQ:SWIR). Boosted by better-than-expected earnings, a major acquisition, new technology, and broad investor interest in the Internet of Things, the company's stock soared 80% in 2014.
In November Sierra posted a 28% year-over-year increase in quarterly revenue with $0.24 in earnings per share. Considering analysts were expecting $0.13 EPS the earnings made Sierra investors very happy.
Not all of the growth came from the company's machine-to-machine module sales or enterprise solutions though. Sierra acquired the rugged mobile router company, In Motion, earlier in the year and part of the upswing in revenues was from In Motion's business. If you take out revenue from the acquisition, Sierra still increased organic revenue 19% year over year.
In addition to that, the company also won a number of key design wins in the automotive market, a major part of Sierra's business. The module maker also expanded it's Legato software platform, offering new solutions to its customers for managing machine-to-machine, or M2M, connections.
While all of this is great, there are few things to consider for Sierra Wireless in 2015.
What to watch
The two Sierra Wireless revenue drivers come from its OEM Solutions and its Enterprise Solutions segments -- with the former contributing about 87% of revenue.
That's been both good and bad for the company. It's worked thus far because Sierra's been able to gain lots of customers and grow revenue by selling its wireless modules and other hardware to them. But it's also been bit of drag when it comes to margins. Sierra's OEM Solutions has gross margins of about 30% right now because larger customers have lots of negotiating power, which lowers unit selling prices.
Sierra knows this, and has tried to diversify its OEM revenue with its enterprise business (cloud-based platforms, security, etc.), but so far OEM revenue is growing about two times faster than enterprise revenue. That's problematic because Sierra's margins are much higher on the enterprise side than with OEM solutions -- about 54% vs. 30%.
I wrote recently that I'm keeping a close eye on Sierra's ability to gain new OEM customers in the automotive market, because the company needs to expand its customer list if it wants to continue pushing revenue up. There's lots of potential there because last year auto sales were at an all time high since 2006, and they're expected to climb even higher this year and next. But it's clear that the company needs to see its Legato platform and other enterprise solutions gain more traction.
Right now, this isn't extremely problematic, but if Sierra is in the same position with its enterprise customers by the middle of 2015 as it is now, it could be a cause for concern. The company still has a lot of potential, but at some point larger customers are going to start weighing down Sierra's OEM solutions even more. If its enterprise business doesn't improve soon, then investors may see the stock's lightning fast rise begin to slow.