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Sierra Wireless Makes a Big Purchase After a Great Quarter

Sierra Wireless (NASDAQ: SWIR) announced second-quarter 2017 results on Thursday after the market closed, highlighting stronger-than-expected growth and two intriguing acquisitions -- albeit with one significantly larger than the other. 

Let's zoom in to get a better look at how the Internet of Things pure play capped the first half, as well as what investors can expect from the company in the coming quarters.

Image source: Getty Images.

Sierra Wireless' results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Growth

Revenue

$173.5 million

$156.2 million

11.1%

GAAP net income (loss)

$6.6 million

$0.7 million

842.9%

GAAP earnings (loss) per share

$0.20

$0.02

900%

Data source: Sierra Wireless.  

What happened with Sierra Wireless this quarter?

  • On an adjusted (non-GAAP) basis -- which excludes items such as stock-based compensation and acquisition expenses -- net income was $9.7 million, or $0.30 per share, up from $6.4 million, or $0.20 per share in the same year-ago period.
  • By comparison, both the top and bottom lines were near the high ends of Sierra Wireless' guidance provided last quarter, which called for revenue of $165 million to $175 million, and adjusted earnings per share in the range of $0.24 to $0.32.
  • By segment:
    • OEM solutions revenue grew 9% year over year to $144.5 million.
    • Enterprise solutions revenue grew 30.7% year over year to $21.7 million.
    • Cloud and connectivity services revenue rose 4.3% to $7.3 million.
  • Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 22.3% to $14.8 million.
  • Sierra Wireless acquired the technology assets of Flow Search Corp., also known as "FlowThings," providing a "data orchestration platform for rapid application development at the edge and in the cloud. Sierra Wireless plans to use both the platform and the subsequent hiring of FlowThings' R&D team to accelerate development and strengthen its own device-to-cloud offering.
  • The quarter ended with $89 million in cash and no debt.
  • In a separate press release on Wednesday, Sierra Wireless announced that it has entered into a definitive agreement to acquire Numerex Corp, (NASDAQ: NMRX) -- a provider of managed enterprise solutions aimed at enabling the Internet of Things -- in a stock-for-stock merger valued at roughly $107 million.
    • As of the first quarter of 2017, Numerex was generating $66 million in annualized revenue.
    • According to the terms of the agreement, Numerex investors will receive 0.18 Sierra Wireless shares for every Numerex share they own.
    • Sierra Wireless will also use its cash to repay Numerex's $20 million in debt.
    • When the transaction closes (it's expected to happen in January), Numerex will become a subsidiary of Sierra Wireless within its cloud and connectivity segment, and Numerex shareholders will own roughly 10% of Sierra Wireless shares on a fully diluted basis.

What management had to say

Sierra Wireless CEO Jason Cohenour stated:

In the second quarter of 2017, we delivered strong revenue and profitability growth on a year-over-year and sequential basis. We continued to strengthen our position as a leader in device-to-cloud solutions for the Internet of Things with new product offerings and the acquisition of FlowThings, an innovative provider of platform services for data orchestration and rapid application development.

Regarding the Numerex deal, Cohenour elaborated:

The acquisition of Numerex accelerates our IoT device-to-cloud strategy by adding an established customer base, significant sales capacity, proven solutions, and recurring revenue scale. The combination of Sierra Wireless and Numerex will represent a powerful business and technology platform that will enable the company to drive a global leadership position in IoT services and solutions.

Looking forward

For the third quarter, Sierra Wireless expects revenue of $167 million to $175 million, and adjusted earnings per share in the range of $0.17 to $0.25. By comparison -- and though we don't usually pay close attention to Wall Street's near-term demands -- consensus estimates predicted adjusted earnings of near the high end of Sierra Wireless' guidance range on roughly the same revenue.

During the subsequent conference call, management explained that it expects gross margin headwinds -- which, to be fair, would be in line with the suggestion last quarter that we may see gross margin compression in the second half -- as an existing high-volume automotive program transitions to a next-generation platform at a lower gross margin level than the current program it's replacing.

Add to that the impending 10% dilution Sierra Wireless investors will incur with the acquisition of Numerex, and it's no surprise that the stock dropping after hours Wednesday in response. If all goes as planned, however, the acquisition should only bolster Sierra Wireless' central role as a leader in the burgeoning Internet of Things space. As a result, and given Sierra Wireless' relative outperformance in the second quarter, I think investors should be happy with where it stands today.

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Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Sierra Wireless. The Motley Fool has a disclosure policy.