This Internet of Things company beat estimates by $0.11 last quarter. Analysts expect double-digit growth this year and next, with 11 increasing their 2017 estimates in the past 30 days.
Sierra Wireless (SWIR)
From Canaccord Genuity Research
Sierra Wireless (SWIR) reported strong Q4 results with revenue of $163M and adjusted EBITDA of $15.5M well above our $161M/$10.0M estimates. Management provided Q1/17 guidance above our expectations as the strong gross margin that drove Q4 upside should continue in 2017 due to improved cost controls and lower IP accruals. We believe Sierra is benefiting from improving IoT macro trends and recovering demand from leading customers.
Further, Sierra Wireless announced a large long-term design win with Volkswagen for two programs driven by Sierra Wirelesses’ differentiated Legato solution combined with its leading LTE technology solutions. Further, we expect continued stronger results from the Enterprise Solutions division with an improved portfolio driving above corporate average growth for this above corporate average gross margin business.
We maintain our belief Sierra Wireless is well- positioned to benefit from long-term IoT industry growth trends in its industry-leading OEM solutions business along with its growing Enterprise Solutions and Cloud and Connectivity Services businesses. In fact, we expect Sierra Wireless will return to grow in line with industry growth trends of 5-10% for the next 2 years following soft 2016 results driven by improving IoT spending trends, new product introductions, and large automotive wins in its OEM Solutions business.
We maintain our BUY rating and increase our price target to $25 based on our increased estimates. OEM solutions drive upside to our Q4/16 estimates; design win momentum strong in 2H/16. Following a tough first three quarters of 2016, the OEM solutions business posted strong Q4 sales of $135M versus our $133M estimate, representing 11.2% YoY growth or the first positive YoY growth since Q3/15. We believe this business will post mid- to high-single-digit growth through 2018 with improving macro trends benefiting 2017 growth and large contract wins such as the announced Volkswagen deals contributing to 2018 growth. Management also indicated 2H/16 was strong in terms of design win activity with wins in automotive, energy, transportation, and networking.
Enterprise and cloud and connectivity services remain long-term growth drivers that should expand blended company gross margin: Enterprise sales of $20.9M exceeded our $20.2M estimate, and we anticipate continued strong growth trends during 2017. We believe several recently released Enterprise Solutions products address important vertical segments and include up-to-date features and functionality including LTE-A. We anticipate this higher margin division should grow faster than our overall growth assumptions, supporting our belief gross margins could expand in 2017 versus 2016. In fact, Sierra Wireless reported Q4/16 non-GAAP gross margin of 34.3% versus our 32.6% estimate.
We are also encouraged the company is continuing to execute on its cross selling strategy with leads for the cloud business coming from existing OEM solutions and enterprise customers.
Given the return to YoY growth in OEM Solutions combined with our expectations for faster growth in the higher-margin Enterprise Solutions division, we anticipate strong leverage in the model and are increasing our 2017/2018 adjusted EBITDA estimates from $42.9M/$53.7M to $53.5M/$66.8M.
T. Michael Walkley and Joshua Reilly, Canaccord Genuity Research, www.canaccordgenuity.com, 617-371-3711, February 9, 2017