TOP CONTRIBUTORS

David Weissman

SWIR AT A GLANCE

P/E ► 6.61 LOW EV/EBITDA ► 3.28 LOW ROA ► 13.8% HIGH ROE ► 18% AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating Expenses Research & DevelopmentSG&AAmortization & Depreciation

Corporate Profile and Strategy

Based in British Columbia, Canada, Sierra Wireless Inc. (SWIR) develops and markets wireless solutions, including data modems for portable computers (PC), embedded modules for original equipment manufacturers (OEMs), rugged vehicle-mounted modems, and mobile phones. Sierra's customers include Lenovo, Panasonic, Toshiba, Hewlett Packard, Hitachi, iPass, Ingram Micro, AT&T, Verizon, Sprint, T-Mobile, Handspring/Palm, and others. Its most popular product is the AirCard, which enables portable computers such as notebooks and personal digital assistants (PDAs) to access the Internet over existing wireless phone networks. Revenue by product segments in the third quarter of 2007 was: 65% from PC Aircards, 25% from OEM/embedded modules, 9% from machine-to-machine & mobile products, and 1% from Other sources. For the third quarter of 2007, the company derived 72% of its revenue from the Americas, 8% from Europe, and 20% from the Asia-Pacific region. Technology wise, in the third quarter, 46% was GSM sales, 53% was CDMA sales, and the remaining 1% was from the Other category.

Investment Thesis

3G Network Deployment: Continued global channel expansion and strong OEM design wins have established Sierra as a market leader in the wireless PC cards and modems market. The company received orders for embedded module designs from twelve PC OEMs, including HP, Lenovo, Fujitsu Siemens, Panasonic, AsusTek, Dialogue, and Itronics. Out of this nine companies have already launched embedded products of Sierra. All cards are to be compatible with 3G wireless networks around the world. Furthermore, the company has successfully shifted existing large customers to its next-generation products and started shipping new EV-DO Revision A AirCard 595 to Verizon and Sprint-Nextel, and 3.6 mbps HSDPA (High Speed Downlink Packet Access) AirCard 875 to AT&T. Higher data rates are expected to improve overall consumer acceptance of the wireless data access offerings. Recently, Sprint Nextel launched new EV-DO USB modems by Sierra Wireless to be used in its mobile broadband network. This new series of USB products expands the addressable market space for the company.

Geographical and Client-Base Expansion: Sierra continues to diversify its business prospects on a global basis. According to ABI Research, the market for mobile modems may reach up to $10 billion by 2010, which represent a compounded annual growth rate of 47%. Over 35 networks are using Sierra's AirCard products. The company now markets and sells AirCard 850/875 to Orange UK, O2 in the UK, Weiss Telecom in France, and Telefonica in Spain. In addition, Sierra is selling HSDPA AirCard to Debitel in Germany, Oi and Orange in France, O2 and Orange in the UK, Swisscom, Sunrise in Switzerland, and Telefonica in Spain. Moreover, Sierra Wireless started shipment of AirCard 875/595 to Telstra (Australia) and to Telecom New Zealand. Market data shows that there exist 130 HSDPA networks implemented in over 60 different countries. On the equipment networking side, Cisco Systems has also integrated Sierra's embedded modules into its new 3G wide area network routers. These initiatives represent the company's diligence in spreading its sales focus to reduce selling concentration away from a limited number of customers it relied on in the past.

New Product Launch: Sierra Wireless introduced a series of AirCards, called ExpressCard and USB wireless modems specifically designed for 3G EV-DO Revision A and HSDPA networks. The company's current next-generation product, HSDPA card, is backward compatible with GSM, GPRS, and EDGE. The company received several purchase commitments for these high-margin products from major operators. According to In-Stat, an information services company focused on personal computers and high-performance microprocessor industry statistics, the market for embedded wireless EV-DO and HSDPA connectivity modules in laptops is expected to grow to approximately 4.5 million units by 2008. To comprehensively address this market, Sierra Wireless launched a series of high-margin 3G rugged mobile products and has specifically targeted the Japanese market. The company's recent acquisition of Airlink also supports this effort. Sierra Wireless started commercial shipment of its next-generation 3G HSUPA AirCards at the end of the third quarter 2007. The company already secured launch commitments for this card from major operators in the U.S., Asia, and Europe.

Strong Finance: Sierra Wireless' financial position remains strong, capable of sustaining near-term expenses and possible fluctuations in sales. At the end of the third quarter, the company had $3.55/diluted share of cash & cash equivalent and no debt outstanding. We believe gross margins may improve moving forward as the company changes its product-mix with the introduction of higher margin machine-to-machine products. In the reported quarter, Sierra achieved its stated objective of above 10% operating margin, much earlier than its target time frame. Over the near-term, management's guidance for the fourth quarter of 2007 is also encouraging, which exceeded initial consensus revenue and earnings estimates. Recently, the company completed a syndicate deal with underwriters through which Sierra received gross proceeds of $85.1 million by means of selling 2.8 million of its own common shares from treasury. Net proceeds from this offering will be spent on general corporate purposes, working capital and potential future acquisitions.

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