Sierra Wireless Grows by Connecting Big Machines to Web

Sierra Wireless Inc., the communications-equipment maker that connects cars and coffee machines to the Internet, is looking for acquisitions to do the same for air compressors and other industrial machines.

Sierra plans to expand further into machine-to-machine communications, or M2M, Chief Executive Officer Jason Cohenour said. He plans to look in North America and Europe for hardware and software providers that help companies connect to machines.

The global machine-to-machine communications industry, or so-called Internet of everything, is expected to double in the next five years to about $200 billion worldwide as machine connections outpace growth in smartphones and tablets, according to ABI Research. With C$176.6 million ($172 million) of cash on its balance sheet from the sale of its mobile modem business for laptops, Sierra is poised to buy, Cohenour said.

“Over time, every machine that can benefit from being connected will be connected in some way,” Cohenour, 52, said in a telephone interview Oct 18. “We want to be the leader.”

Richmond, British Columbia-based Sierra fell 0.4 percent to C$19.75 for a market value of C$607 million at the close in Toronto today. The company’s shares surged 149 percent in the last year through yesterday, third among its North American communications-equipment peers, according to data compiled by Bloomberg. San Jose, California-based Ubiquiti Networks Inc. was first with a 228 percent gain, followed by CalAmp Corp. of Oxnard, California, which posted a 184 percent advance.

Nespresso, Chrysler

Sierra is already the global leader in sales of modules used by manufacturers to connect products to the Internet, with 34 percent of the market, according to New York-based ABI. The modules let doctors remotely monitor patients and help homeowners control security systems from a smartphone. They can also allow a broken-down car to send out a distress signal while notifying the automaker of a possible defect that may need to be corrected in future models.

Such devices rely on wireless networks, such as those provided by mobile-phone carriers, to transmit information.

Nestle SA, based in Vevey, Switzerland, uses Sierra’s equipment to maintain and monitor the performance of its Nespresso coffee machines in restaurants, hotels and offices. Sierra’s modules are also installed in Chrysler Group LLC and Toyota Motor Corp. vehicles.

Growth in M2M connections is poised to outpace tablets and smartphones. Traditional wireless subscribers will grow 3.4 percent to 7.2 billion connections in 2017, according to Campbell, California-based Infonetics Research. M2M connections will grow seven times as fast, or about 24 percent, to 545 million over the same time frame, Infonetics estimates.

Next Wave

“It’s the next wave of opportunity that’s emerging from these networks,” said Godfrey Chua, head of M2M research at Infonetics. “When you think about the universe of possible devices out there, it really is pretty limitless.”

Sierra’s agreement in January to sell its AirCard mobile-modem business for $138 million proved the catalyst for its share advance, as the company reinvented itself into a pure M2M company.

“Sierra Wireless, by dumping or selling the AirCard business, is one of the leaders in the M2M space, a space that is growing,” said Christian Cyr, a portfolio manager at Fiera Capital Corp. who helps manage C$1.2 billion, including Sierra shares.

Sierra agreed this month to buy the module business of South Korea’s AnyData Corp. for $5.9 million. It acquired the M2M business of France’s Sagemcom SAS for 44.9 million euros ($61.9 million) in August 2012.

The company plans to expand its main module business without major acquisitions, focusing instead on buying software companies and those that specialize in connecting industrial machines, Cohenour said.

Big Machines

“These are big, high-value machines, and if they break there’s a big cost to go out and fix them,” Cohenour said. “In an industrial setting, players or companies who connect to their large, expensive machines are able to provide preventive maintenance to their customers. They’re able to lower service costs, they’re able to often generate new streams of revenue -- perhaps through premium service plans.”

Atlas Copco AB of Stockholm, a Sierra client that makes industrial air compressors the size of school buses, can monitor and potentially remotely fix problems before they cause a breakdown that might take down a factory, Cohenour said.

Expansion into machine-to-machine software could be particularly profitable, with as much as 70 percent of the industry’s total current value of $100 billion derived from added services, according to ABI.

Record High

“They can sell a module and then complement that with a suite of services,” Dan Shey, practice director of M2M at ABI, said in an Oct. 18 phone interview. “They’re positioned well in that they have a lot of those key components to be considered a one-stop-shop supplier.”

Consumers need to be convinced that there are benefits to a wide array of devices being hooked up to the Internet for the M2M market to advance, Shey said. The growth of connected cars and medical devices will be key to demonstrating M2M’s utility to consumers.

Sierra is expected to report on Nov. 7 that revenue fell 30 percent to $113.6 million in the third quarter from a year earlier, according to the average of 11 estimates in a Bloomberg survey of analysts. Adjusted earnings are estimated to have fallen 76 percent to 7 cents a share. The declines are largely due to the sale of the AirCard business, analysts said.

Bull Market

Sierra is still a long way off from its record closing high of C$216.75, posted during the Internet technology bull market in February 2000. Seven analysts say the stock is a buy, five say hold and two say sell, according to data compiled by Bloomberg. The 12-month average target price of 12 analysts is C$18.21, an 8.1 percent decline from yesterday’s close.

In the next five years, machine-to-machine connectivity will grow fastest in health care, with a 74 percent expansion, while the auto industry is forecast to grow 42 percent, according to a Feb. 6 report from Cisco Systems Inc.

Sierra supplies Internet modules to both industries.

“More and more devices are going to get connected to the Internet, so we’re not only talking about smartphones and tablets, we’re talking about appliances, your fridge, the TV, automotive, smart meters,” said Steven Li, an analyst with Raymond James Ltd. in Toronto who has the equivalent of a hold rating on the stock. “All of a sudden when you think about devices as not just smartphones, the number of units goes into the billions.”

(Corrects date in Oct. 23 story of company earnings release in 20th paragraph)
Before it's here, it's on the Bloomberg Terminal.