Sierra Wireless' CEO Hosts In Motion Technology Acquisition Announcement Conference Call (Transcript)

Jan.27.14 | About: Sierra Wireless, (SWIR)

Sierra Wireless, Inc. (NYSE:USA) (NASDAQ:SWIR)

In Motion Technology Acquisition Announcement

January 27, 2014 08:00 AM ET

Executives

Dave McLennan - CFO

Jason Cohenour - President and CEO

Analysts

Mike Walkley - Canaccord Genuity

Paul Treiber - RBC Capital Markets

Tim Quillin - Stephens Incorporated

Nazir Iqbal - Solomon Partners

Richard Seed - Cormark Securities

Operator

Good morning and welcome to the Sierra Wireless Investor Conference Call. At this time all lines are in a listen-only mode. After the presentation, we will conduct a question-and-answer session via the audio conference call. Instructions will be provided at that time. I would like to now remind everyone that this call is being recorded today, January 27, 2014.

I would now like to turn the meeting over to Mr. Jason Cohenour, Sierra Wireless’ Chief Executive Officer; and Mr. Dave McLennan, Sierra Wireless Chief Financial Officer. Please go ahead, gentlemen.

Dave McLennan

Thank you, Lisa, and good morning everyone. This is Dave McLennan speaking. Thank you for joining today's conference call and webcast. As a reminder, today’s presentation is being webcast and will be available on our website following the call.

Just before we get started, I will reference the company’s Safe Harbor statement. A summary of our Safe Harbor Statement can be found on Page 2 of the webcast and is now being displayed. Today's presentation contains certain statements and information that are not based on historical facts and constitute forward-looking statements.

Our forward-looking statements are based on a number of material assumptions including those listed on Page 22 of the webcast presentation, which could prove to be significantly incorrect. Additionally, our forward-looking statements are subject to substantial known and unknown material risks and uncertainties.

As you may have already read in our Press Release distributed earlier this morning, we’re very excited to announce the Sierra Wireless has entered into a definite agreement to acquire all of the outstanding shares of In Motion Technology for CAD23 million or $21 million in cash consideration. We believe this is an excellent strategic fit for both companies and is further evidence of our commitment to accelerate our M2M leadership position through M&A.

Before I turn the call over to Jason to discuss In Motion and the strategic rationale for the transaction, here is a quick summary of the deal. In Motion is a private company based here in Vancouver, British Columbia and is a leading provider of mobile enterprise solutions. In Motion recorded revenue of US $15 million and gross margin of approximately 50% in the trailing 12 months ended December 31, 2013.

Our acquisition price represents a multiple to revenue of 1.4 times. It is an all cash transaction and the purchase price will be funded from our current cash resources. We expect the acquired business to have no material impact on our non-GAAP earnings in 2014 and to be modestly accretive to non-GAAP earnings in 2015.

At the time closing, In Motion will become a whole owned subsidiary of Sierra Wireless with its products and team integrated into our Enterprise Solutions segment. We expect the deal will close in early March and is subject to customary closing conditions.

With that, over to you, Jason.

Jason Cohenour

Thank you, Dave, and good morning everyone. I will start with some background on In Motion technology. In Motion is a leading provider of mobile enterprise networks and solutions for mission critical applications. They provide high end, rugged, in vehicle routers, tightly integrated with an advanced mobile optimized security system and a powerful management and application platform.

In Motion’s products and solutions target growth segments such as public safety, transit, and commercial fleet. In Motion has established an impressive customer list in these attractive markets as well as relationships with powerful channel partners. In our assessment, the long-term growth opportunity for In Motion’s high value solutions is compelling.

As Dave mentioned, In Motion is based here in Vancouver and a large portion of its team of approximately 55 employees is a close 15-minute drive from the Sierra Wireless headquarters. The proximity of the In Motion team was another key factor in our decision to pursue a combination of the companies.

We believe that In Motion is an excellent strategic fit for Sierra Wireless. As we have consistently stated, our M2M Enterprise Solutions segment represents a great growth in value creation opportunity for the company and shareholders. In Motion will add scale, momentum, and strong high margin solutions to the segment, and we bring the two businesses together we will be a clear leader in the growing M2M Enterprise Wireless Solutions market with leading market share in wireless gateways and routers in our target segments.

Additionally, our complementary product portfolios and channels will provide the broadest choice of device to cloud solutions for the enterprise with devices that range from simple gateways to full featured mobile routers and a comprehensive suite of cloud services for device management, security, and mobility applications. The combination also strengthens our position and capabilities in important high growth, high value markets including public safety, transportation, and commercial fleet.

Combining with In Motion solidifies our leadership position in wireless M2M gateways, routers and solutions, builds team and revenue scale and attractive segments and enhances our business model. With the addition of In Motion, the Sierra Wireless Enterprise Solutions segment will have annual revenue of more than $73 million on a trailing 12 month basis, a growth rate of 15% to 20% and a solid gross margin profile of over 58% [ph]. In short we believe we’re creating a strong sustainable business, with an attractive business model in an attractive space.

For our customers, the combination of In Motion’s router, security, and software portfolio with Sierra’s current device to cloud solutions will provide our enterprise customers with the broadest choice of solutions in the market. Our combined hardware portfolio will represent a full suite of wireless devices from simple gateways to full featured network-agile routers.

The complementary alignment of the product lines also extends to our combined cloud offering. Sierra's AirVantage M2M Cloud for remote device management configuration and application enablement will be joined with In Motion’s on-board mobility manager application suite and on-board connection manager VPN to offer customers more options and more flexibility.

As a combined company the product offering for our solution segment will also extend further into end-to-end solutions driving significant value for our customers and profitable growth opportunities for Sierra Wireless.

When describing the target markets for our enterprise solutions offering, we’ve often talked about mobile, industrial and enterprise as key segments for the company. By combining with In Motion we’re strengthening our position in the mobile space and in particular the mobile enterprise. Together In Motion and Sierra Wireless will hold a strong combined position in key mobility growth areas. In public safety, the combined company will have the clear number one market share in North America, providing in-vehicle gateways and routers for police, fire and EMS vehicles, as well as other public safety assets.

We expect significant growth in this market with the transition to 4G LTE, and increasing demand for high bandwidth applications such as video. We also believe that the impending FirstNet Band 14 deployment in the United States will be an important long-term growth driver.

In transit In Motion and Sierra Wireless gateways and routers and related software provide rail, bus and taxi operators with the ability to connect their vehicles quickly and securely and to enable advanced services such as customer Wi-Fi, digital signage, video surveillance, and electronic fare payments, these in addition to traditional vehicle-tracking and dispatch applications.

In commercial fleets, our combined offering allows our customers to extend enterprise networks to any remote vehicle or mobile asset. Many utilities and commercial fleet service organizations are equipping their fleets with high-end in-vehicle routers and related applications to provide high bandwidth secure connectivity to an increasing number of field devices and systems that need to access the enterprise network throughout the workday.

The addition of In Motion’s team and product offering also results in a unique set of capabilities that will further extend our technology leadership in global business platform. On the technology side, we are further solidifying our leadership in advanced air-interface protocols, mutli-network connectivity and embedded applications while also offering our clients advanced enterprise networking and security solutions including cloud services, applications and rich APIs for easy customer integration.

As a combined entity we believe our global platform will be unique. We will have a team with significant scale, as well at established direct and indirect global channels, and experienced in-field customer support team and world class supply chain and manufacturing operations. Together we expect our enterprise solutions segment to have a strong scalable foundation from which to drive high-margin profitable growth today and over the long-term.

So in summary, we are continuing to accelerate our strategy by delivering on our M&A objectives. We are the global leader in M2M devices in cloud services, and the addition of In Motion builds scale and brings important capabilities to our higher margin enterprise solution segment. This combination will also help us to advance our device-to-cloud strategy, adding breath to hardware and software offering which will enable us to bring more value to our customers and to capture more of the value chain. I will end with offering a warm welcome to the In Motion team. I am excited about bringing together our two great teams into creating value for our customers and shareholders.

Liza, this concludes our prepared remarks. So I will now turn the call back over to you who can poll for questions.

Question-And-Answer Session

Operator

[Operator Instructions]. Our first question comes from Mike Walkley from Canaccord. Your line is open.

Mike Walkley - Canaccord Genuity

Dave, just on the breakeven for 2014 and accretive in 2015 and beyond, is this despite the 50% gross margin just due to them having a higher OpEx structure, so it's kind of breakeven at the current revenue run rates and then as the drivers come in place in ’15 and beyond, do you see leverage from the acquisition?

Dave McLennan

Yes that’s right, Mike. We’ve got scenarios for ’14 that range from slightly negative to slightly positive on the earnings front, and really it's just all about scale. So as the company grows and as we integrate it into the enterprise solutions, we think we can bring it to profitability pretty quickly in ‘15.

Mike Walkley - Canaccord Genuity

Right thanks, and then Jason just, it seems to make sense of the acquisition strategy, where you're going with this; but as you look to the public safety market, what are some of your assumptions on the timing for the LTE safety market to pick up? It's been slow for M2M, but things like Band 14, people seem excited about. What are some of your assumptions for that growth opportunity?

Dave McLennan

Yes, I think we have -- even without the first net deployments Mike, we have got a great growth opportunity in public safety and we are very -- the business is very North American focused today. I think we have got opportunities also outside North America. The deployment of public 4G LTE is clearly a growth driver, the need to connect more sensors in the police vehicle and the need for more video evidence capturing at the point of police scenes, I think are all pretty interesting growth drivers even without Band 14 deployment. So for us the way we think about Band 14 is it’s a very interesting growth opportunity at some point in the future but certainly it’s not required to drive growth in this space.

Mike Walkley - Canaccord Genuity

Great. And do you or In Motion already have a modem solution for Band 14?

Jason Cohenour

In Motion does. In fact they have been participating in the early Band 14 trials. Their routers are multi-network capability Mike. So you can fit up to -- one of their routers you can fit up to six wide area wireless connections. And one of those wide area wireless connections that they have implemented does support Band 14.

Operator

And our next question comes from Paul Treiber from RBC Capital Markets. Your line is open.

Paul Treiber - RBC Capital Markets

One of the strategies for the acquisition is the device-to-cloud platform. What percent of the revenue right now or what percent of customers are currently using cloud services?

Jason Cohenour

I would say most of their customers Paul are using either their SaaS offering or license customer premise license software offering. In terms of a percentage of revenue contribution, it is in the neighborhood of 10% and I would say that the focus and momentum is to bring that to a higher percentage of revenue and they seem to be getting pretty good traction on that.

Paul Treiber - RBC Capital Markets

And then you mentioned that their business is primarily North American. What's the geographic breakdown of their revenue, and then do you see an opportunity to leverage your distribution channels into Europe and in other markets?

Jason Cohenour

We -- so in terms of geographical breakdown, think about it as close to 100 percentage you can get in North America. And with respect to international opportunities, we clearly think overtime there is very interesting leverage opportunities bringing In Motion hardware and software solutions through our established international channels.

Paul Treiber - RBC Capital Markets

Okay. And then one last one. Is In Motion currently a customer of Sierra's module business, and then is there any overlap in customers or markets between your AirPrime business and In Motion?

Jason Cohenour

I’m not sure I understand the second part of the question but they are indeed a small customer of our AirPrime embedded modules and with respect to -- are you asking with respect to the overlap of their business with our AirLink?

Paul Treiber - RBC Capital Markets

Yes, sorry, with AirLink -- specifically customers.

Jason Cohenour

Yes I know. It’s a very interesting I would say complimentary product line-up and customer line-up and so we certainly -- as you know we certainly sell AirLink boxes today into public safety deployments. It’s one of our significant markets. And I think the way to think about In Motion is where the requirement is today, if a public safety agency’s requirements exceed the capability of an AirLink box, the In Motion solution becomes a very interesting alternative. It’s a much higher cost, much higher ASP solution. And so I would say we rarely compete head to head but we certainly occupy positions in the same segments, in particular with public safety and utility field service. But the solutions are so complementary that we rarely come to a head-to-head competitive situation.

Operator

And our next question comes from Tim Quillin from Stephens Incorporated. Your line is open.

Tim Quillin - Stephens Incorporated

Overtime, do you see opportunities to get some operating expense synergy across the companies; and then also is there an opportunity to either do product rationalization, or I guess as you're alluding to, do you segment out the product lines where In Motion becomes your high end brand and stays the brand, or how do you handle that overtime?

Dave McLennan

Right Tim, it’s Dave. Just to the first part of your question in terms of synergies, I think the reality is we are this is all about the people. At IMTM we are going to be integrating them into our team here in the enterprise solutions. So I don’t see, I don’t see tremendous synergies there. Where we will be focused though is in product costs and we think that as we on-board their model with our auto manufacturing model, there’s opportunities over time for some product cost reductions.

Jason Cohenour

I would add, I think, I think the real synergies to focus on Tim our longer term growth synergies. We’re actually -- one of the key underpinning points of doing the deal is that we build more scale than this high value part of our business and that’s going to enable us to accelerate our roadmap. So yes, we’re going to look at the roadmap and there might be some overlap and some opportunities to trim a program or two, but I would think about it as more expanding the product line and expanding our capabilities so that we can drive faster growth in what is a very attractive high value, high margin segment.

Tim Quillin - Stephens Incorporated

Okay and you had planned to keep both the In Motion and AirLink brands?

Jason Cohenour

Well that’s something we haven’t yet decided. So we’ll be putting together a joint integration team very quickly and figuring all that out, both how the team’s come together and how the branding and product lines come together.

Tim Quillin - Stephens Incorporated

Okay thank you and then this sounds like a very good fit, a nice acquisition. What else is in the pipeline and kind of what are the range of opportunities for you right now. Thank you.

Jason Cohenour

Thanks Tim. Oh gosh, we just announced one today. So we’re not going to announce two but, no I would say, albeit consistent on this, we are - we’ve got a very busy and active M&A funnel. The majority of the names that do circulate around our enterprise solutions segment because we are very excited about building a accelerating growth there and capturing more of the value chain. So you know more names in the gateway and router space and more names in the services space, both cloud services and wireless services.

Operator

And our next question comes from Nazir Iqbal from Solomon Partners. Your line is open.

Nazir Iqbal - Solomon Partners

Just a quick one, Jason, Dave. In the 15% to 20% growth, is that accounting just for their business as is when you acquire them or is there some kind of a synergy expectation in terms of the international opportunities you talked about.

Jason Cohenour

Yes I think, I think about that as the combined growth rates, once you add In Motion to our Enterprise Solutions segment. So that’s the combined growth rate for our Enterprise Solutions segment, and I would view that as kind of a short to mid-term growth metric and we would certainly hope that over time through growth synergies we can accelerate that.

Operator

[Operator Instructions]. And your next question comes from Richard Seed from Cormark Securities. Your line is open.

Richard Seed - Cormark Securities

Jason, you talked about customers, marquee names and channel partners. Could you maybe give us some insight as to who some of those customers and channel partners would be?

Jason Cohenour

Sure, sure. So, you know just kind of quick high level in public safety, some of the In Motion customers include Los Angeles County Sherriff, City of Tempe, Seattle Fire, Acadian Ambulance and pause there, they have a very, very strong position with Ambulance companies and on the transit side, Denver Regional Transit Authority and utility, Florida Power and Lights and a number of others. I think their customer count is several hundred now.

Richard Seed - Cormark Securities

Okay and I guess related to that if you look at the competitive markets, that’s fairly fragmented and just trying to a get a sense of their share in this call that public market in general, whichever a handle on that.

Jason Cohenour

You know it’s hard to get a handle on that quite candidly but I would say if you look at public safety, the combined, our combined presence -- Enterprise Solutions presence in public safety would be far and away the number one market share and similarly I would say that’s probably true also in utilities, but candidly just don’t have very specific numbers for you, but I would put us in a strong leadership position.

Richard Seed - Cormark Securities

Okay, and did you mention how many employees they have?

Jason Cohenour

55. And about 40 of those are here at Vancouver.

Richard Seed - Cormark Securities

And would you have like a general split of what functions they would be in?

Jason Cohenour

It’s about 40% engineering and the balance would be principally sales -- sales and marketing.

Richard Seed - Cormark Securities

Okay and then one last question. Maybe you can give us a view of how this whole transaction came about. I know you guys are fairly active in M&A but there may be some discussion in terms of how it surfaced here?

Jason Cohenour

Well, they’re local. So not surprising we would find each other but we’ve known about and been keeping an eye on In Motion Technology for probably three years, and I would say engaged in at least conceptual discussions for a couple of years. They’re our customer, and we address some of the same segments. So that’s what brought us together and that’s how we started initially sharing the idea of combining the companies.

Operator

And we have no further questions in queue. I’ll turn the call back over to our presenters.

Jason Cohenour

That’s great. Thanks very much, Lisa. And again thank you everyone for joining today’s call. I will end by saying I’m very excited about closing this transaction and putting our teams together. I really do believe this is a super opportunity to build strength and scale and momentum in our Enterprise Solutions market.

So with that Lisa, I think we can conclude today’s call.

Operator

This concludes today’s conference call. You may now disconnect.

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