When Sierra Wireless (TSX:SW) sold its AirCard unit to California-based Netgear early this year, it was the last and largest move in a long term plan.
That plan was to become a machine-to machine pure play, something the company sees as a path to sustainable profitability. Numbers out of the Las Vegas Computer Electronics Show this year reveal that the M2M market has become staggering in its scope.
A study by Cisco revealed that the number number of connected devices now exceeds the world population. They pegged the number at 8.2-billion, and expect it to rise to 15 billion by 2015 and 40 billion by 2020.
Following the company’s Q1 results yesterday, Cantech Letter’s Nick Waddell talked to Sierra Wireless CEO Jason Cohenour about the company’s now fully realized identity.
Jason, congrats on your Q1 results. You have had some moving parts going into this quarter on your way towards becoming a M2M pure play. How would you typify this period of time?
Thanks for the congrats Nick! This is certainly an exciting period for Sierra Wireless. Our recent sale of the AirCard assets and operations to Netgear was another critical step in our transformation. Following the sale, we are now an M2M (machine-to-machine) pure play, and can focus all of our efforts and resources on capturing the M2M growth opportunity.
You have been in the M2M business since at least 2007, when you bought Airlink Communications. When did you realize that the proper direction for the company was an M2M pure play?
We have actually been in the M2M business a lot longer than most people think. Some of the company’s first products, going all the way back to the mid-90s, were M2M products – of course, we didn’t call the market “M2M” back then. In the late 90s and early 2000s, the mobile computing (AirCard) part of our business enjoyed phenomenal growth. So, of course, this huge growth opportunity consumed most of the company’s focus and resources…but M2M was still an important part of our business and company DNA. By 2007, it was clear that M2M was coming of age and would soon be a great profitable growth opportunity. It was about this time that we decided to accelerate our investment in the space and to begin to build a market leading franchise. This wasn’t a big stretch for us, as M2M had always been part of our business and was ingrained in our DNA. This led us to the acquisition of AirLink in 2007 and two years later, the acquisition of Wavecom. Today, as a result of both organic investment and acquisitions, we are the clear global market leader in M2M.
I think we have an excellent track record of selecting good acquisition targets and integrating them well – leading to growth and value creation. This makes us pretty confident about having M&A be an important part of our growth strategy going forward.
Has your success integrating acquisitions made you bolder about growing that way? What mix of organic and acquired growth should investors expect going forward?
I think we have an excellent track record of selecting good acquisition targets and integrating them well – leading to growth and value creation. This makes us pretty confident about having M&A be an important part of our growth strategy going forward. Following the sale of AirCard, our balance sheet is very strong, with over $160M in cash and no debt – so we certainly have the financial capacity to engage in M&A. Having said this, organic investment and growth is absolutely key as well. I think about it this way: Job One is to drive profitable organic growth. We have a cost structure that can facilitate organic growth to significantly higher revenue levels. Job Two is to accelerate our growth and value creation with smart acquisitions.
Can you give us an idea of how you might use your free cash flow going forward, you recently initiated a share buyback…
I think our capital allocation strategy strikes the right balance. Our main use of deal proceeds will be on acquisitions – we are very focused on finding great M2M companies that help us to drive our strategy and growth forward. We believe that we can create great value for shareholders this way. However, we also believe that we can create value by way of a return of capital. We think our shares are a great buy – so we will be in the market buying shares and capturing EPS leverage.
Just how big is the M2M space and what sub-sectors or verticals of it are you tackling?
Over time, we believe that the M2M space represents a massive market opportunity. We believe eventually every machine that can derive value from being connected, will be connected. This includes everything from home appliances, to cars, to lighting systems and beyond. Industry analysts estimate that there are about 1.4 Billion connected devices in operation today. Some analysts believe that this will grow to 50 billion by the year 2020. This represents a great opportunity for the market leader – us!
With respect to segments, as you might expect, the market is quite fragmented. For us, current key segments include Automotive (connected car), Transportation (Fleet management), Networking (Wire-line replacement) Energy (smart metering/smart grid), PC OEMs (notebook computer connectivity) and Payment (Point of sale terminals). I expect that this will grow/evolve over time. In time, segments such as healthcare (patient monitoring) are likely to be very big.
What do you hope to accomplish in the next 12-18 months?
In this timeframe we are really focused on 1) profitable organic growth and 2) accelerating growth and value creation through M&A. Organically, we are invested for growth and expect to leverage our leading market position, broad product line, industry leading innovation and global presence to continue to expand our business. In M&A, we are focused on targets that are aligned with our strategy, help us to further expand our position in the M2M value chain, and provide opportunities for growth synergies.