Sierra Wireless Reports Third Quarter 2014 Results

Sierra Wireless, Inc. (NASDAQ:SWIR) (TSX:SW)

Third Quarter 2014 highlights

• Record revenue of $143.3 million, an increase of 27.6% compared to Q3 2013
• Non-GAAP earnings from operations of $8.4 million, an increase of 249% compared to $2.4 million in Q3 2013
• Adjusted EBITDA of $11.8 million, an increase of 101% compared to Q3 2013
• Non-GAAP EPS of $0.24 compared to $0.11 in Q3 2013

Sierra Wireless, Inc. (NASDAQ: SWIR) (TSX: SW) today reported results for its third quarter ending September 30, 2014. All results are reported in U.S. dollars and are prepared in accordance with United States generally accepted accounting principles (GAAP), except as otherwise indicated below.

“In the third quarter of 2014, we leveraged our global leadership position in M2M to drive record revenue and strong profitability,” said Jason Cohenour, President and Chief Executive Officer. “In the fourth quarter, we expect to deliver continued growth in revenue and profitability. While executing operationally, we will continue to pursue acquisitions that help accelerate our growth and enhance our strategic position.”

Revenue for the third quarter of 2014 was $143.3 million, an increase of 27.6% compared to $112.3 million in the third quarter of 2013, and an increase of 6.1% compared to $135.0 million in the second quarter of 2014. Revenue from OEM Solutions was $124.3 million in the third quarter of 2014, up 29.7% compared to $95.9 million in the third quarter of 2013. Revenue from Enterprise Solutions was $19.0 million in the third quarter of 2014, up 15.4% compared to $16.4 million in the third quarter of 2013. On a consolidated basis, organic revenue growth, which excludes contribution from the acquired In Motion Technology and AnyData businesses, was 18.8% compared to the third quarter of 2013.

GAAP RESULTS

• Gross margin was $47.1 million, or 32.8% of revenue, in the third quarter of 2014, compared to $37.3 million, or 33.3% of revenue, in the third quarter of 2013.
• Operating expenses were $44.1 million and earnings from operations were $2.9 million in the third quarter of 2014, compared to operating expenses of $40.6 million and a loss from operations of $3.3 million in the third quarter of 2013.
• Net loss from continuing operations was $2.9 million, or $0.09 per diluted share, in the third quarter of 2014, compared to net earnings from continuing operations of $1.1 million, or $0.03 per diluted share, in the third quarter of 2013. The third quarter of 2014 included an $8.0 million foreign exchange loss associated with the translation of certain foreign denominated balances, compared to a $2.6 million gain in the third quarter of 2013.

NON-GAAP RESULTS

• Gross margin was 32.9% in the third quarter of 2014, compared to 33.4% in the third quarter of 2013.
• Operating expenses were $38.8 million and earnings from operations were $8.4 million in the third quarter of 2014, compared to operating expenses of $35.1 million and earnings from operations of $2.4 million in the third quarter of 2013.
• Net earnings from continuing operations were $7.7 million, or $0.24 per diluted share, in the third quarter of 2014, compared to net earnings from continuing operations of $3.5 million, or $0.11 per diluted share, in the third quarter of 2013. The non-GAAP tax rate in the third quarter of 2014 was 12%.
• Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") was $11.8 million in the third quarter of 2014, compared to $5.9 million in the third quarter of 2013.

Cash and cash equivalents at the end of the third quarter of 2014 were $196.1 million, representing an increase of $27.7 million compared to the end of the second quarter of 2014. Cash generated from operations during the third quarter was $28.7 million, including a $13.9 million reduction of prepaid inventory advances.

Non-GAAP results exclude the impact of stock-based compensation expense and related social taxes, acquisition costs, gain on sale of the AirCard business, restructuring costs, integration costs, disposition costs, acquisition amortization, impairment, foreign exchange gains or losses on translation of balance sheet accounts, and certain tax adjustments. We disclose non-GAAP amounts as we believe that these measures provide our shareholders with better information about actual operating results and assist in comparisons from one period to another.

Adjusted EBITDA as defined equates to earnings (loss) from operations plus stock-based compensation expense and related social taxes, acquisition costs, restructuring costs, integration costs, impairment, and amortization. The reconciliation between our GAAP and non-GAAP results is provided in the accompanying schedules.

Financial Guidance

In the fourth quarter of 2014, we expect revenue to grow sequentially and on a year-over-year basis, gross margin percentage to improve compared to the third quarter of 2014 and operating expenses to increase slightly compared to the third quarter of 2014. We expect the non-GAAP tax rate in the fourth quarter of 2014 to be similar to the 12% non-GAAP tax rate in the third quarter of 2014. This results in the following non-GAAP guidance for the fourth quarter of 2014:

Q4 2014 Guidance		Consolidated Non-GAAP
Revenue		$145.0 to $148.0 million
Earnings from operations		$9.0 to $10.0 million
Net earnings		$7.9 to $8.8 million
Earnings per share		$0.25 to $0.28 per share

This non-GAAP guidance for the fourth quarter of 2014 reflects current business indicators and expectations. Inherent in this guidance are risk factors that are described in greater detail in our regulatory filings. Our actual results could differ materially from those presented above. All figures are approximations based on management's current beliefs and assumptions.

Conference call and webcast details

Sierra Wireless President and CEO, Jason Cohenour, and CFO, David McLennan, will host a conference call and webcast with analysts and investors to review the results on Wednesday, November 5, 2014, at 5:30 PM Eastern Time (2:30 PM PT). A live slide presentation will be available for viewing during the call from the link provided below.

To participate in this conference call, please dial the following number approximately ten minutes prior to the start of the call:

• Toll-free (Canada and US): 1-877-201-0168
• Alternate number: 1-647-788-4901
• Conference ID: 89614174

To access the webcast, please follow the link below:

Sierra Wireless Q3 2014 Conference Call and Webcast

If the above link does not work, please copy and paste the following URL into your browser:

http://www.snwebcastcenter.com/webcast/sierrawireless/2014q3/

The webcast will remain available at the above link for one year following the call.

To access a full copy of our Q3 2014 earnings release, please follow the link below:

http://www.sierrawireless.com/AboutUs/investorinformation.aspx

Media Contact:		Investor Contact:
Sharlene Myers		David Climie
Manager, Global Public Relations		Senior Director, Investor Relations
+1 (604) 232-1445		+1 (604) 231-1137
smyers@sierrawireless.com		dclimie@sierrawireless.com
		David G. McLennan
		Chief Financial Officer
		+1 (604) 231-1181
		investor@sierrawireless.com

Cautionary Note Regarding Forward-Looking Statements

Certain statements and information in this press release are not based on historical facts and constitute forward-looking statements or forward-looking information within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and Canadian securities laws (“forward-looking statements”) including statements and information relating to our financial guidance for the fourth quarter of 2014 and our fiscal year 2014, our business outlook for the short and longer term and our strategy, plans and future operating performance. Forward-looking statements are provided to help you understand our views of our short and longer term prospects. We caution you that forward-looking statements may not be appropriate for other purposes. We will not update or revise our forward-looking statements unless we are required to do so by securities laws.

Forward-looking statements:

• Typically include words and phrases about the future such as “outlook”, “will”, “may", “estimates”, “intends”, “believes”, “plans”, “anticipates” and “expects”.
• Are not promises or guarantees of future performance. They represent our current views and may change significantly.
• Are based on a number of material assumptions, including those listed below, which could prove to be significantly incorrect:

• Our ability to develop, manufacture and sell new products and services that meet the needs of our customers and gain commercial acceptance;
• Our ability to continue to sell our products and services in the expected quantities at the expected prices and expected times;
• Expected cost of goods sold;
• Expected component supply constraints;
• Our ability to “win” new business;
• Expected deployment of next generation networks by wireless network operators;
• Our operations will not be adversely disrupted by component shortages or other development, operating or regulatory risks; and
• Expected tax rates and foreign exchange rates.

• Are subject to substantial known and unknown material risks and uncertainties. Many factors could cause our actual results, achievements and developments in our business to differ significantly from those expressed or implied by our forward-looking statements, including without limitation, the following factors. These risk factors and others are discussed in our Annual Information Form and Management's Discussion and Analysis of Financial Condition and Results of Operations, which may be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov and in our other regulatory filings with the Securities and Exchange Commission in the United States and the Provincial Securities Commissions in Canada.

• Actual sales volumes or prices for our products and services may be lower than we expect for any reason including, without limitation, continuing uncertain economic conditions, price and product competition, different product mix, the loss of any of our significant customers, or competition from new or established wireless communication companies;
• The cost of products sold may be higher than planned or necessary component supplies may not be available, may be delayed or may not be available on commercially reasonable terms;
• We may be unable to enforce our intellectual property rights or may be subject to litigation that has an adverse outcome;
• The development and timing of the introduction of our new products may be later than we expect or may be indefinitely delayed;
• Transition periods associated with the migration to new technologies may be longer than we expect;
• Unanticipated costs associated with litigation or settlements associated with intellectual property matters; and
• Higher than anticipated costs; disruption of, and demands on, our ongoing business; and diversion of management's time and attention in connection with acquisitions or divestitures.

About Sierra Wireless

Sierra Wireless (NASDAQ: SWIR) (TSX: SW) is the global leader in machine-to-machine (M2M) devices and cloud services, delivering intelligent wireless solutions that simplify the connected world. We offer the industry's most comprehensive portfolio of 2G, 3G and 4G embedded modules and gateways, seamlessly integrated with our secure M2M cloud services. Customers worldwide, including OEMs, enterprises, and mobile network operators, trust our innovative solutions to get their connected products and services to market faster. Sierra Wireless has more than 900 employees globally and has R&D centers in North America, Europe and Asia. For more information about Sierra Wireless, visit www.sierrawireless.com.

"AirPrime," "AirLink," and "AirVantage" are trademarks of Sierra Wireless. Other product or service names mentioned herein may be the trademarks of their respective owners.

SIERRA WIRELESS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS (LOSS)

(In thousands of U.S. dollars, except where otherwise stated)

(unaudited)

		Three months ended September 30,								Nine months ended September 30,
		2014				2013				2014				2013
Revenue		$		143,270		$		112,262		$		399,445		$		323,252
Cost of goods sold		96,215				74,916				270,472				216,054
Gross margin		47,055				37,346				128,973				107,198
Expenses
Sales and marketing		12,633				10,452				37,794				31,489
Research and development		19,887				17,806				59,925				54,038
Administration		9,006				9,297				28,019				26,323
Restructuring		71				14				1,058				157
Acquisition and integration		356				139				1,397				166
Impairment		—				—				3,756				—
Amortization		2,159				2,939				7,017				9,142
		44,112				40,647				138,966				121,315
Earnings (loss) from operations		2,943				(3,301			)	(9,993			)	(14,117			)
Foreign exchange gain (loss)		(8,039			)	2,563				(8,538			)	1,902
Other income (expense)		317				(26			)	608				(124			)
Loss before income taxes		(4,779			)	(764			)	(17,923			)	(12,339			)
Income tax expense (recovery)		(1,875			)	(1,839			)	(2,771			)	1,266
Net earnings (loss) from continuing operations		(2,904			)	1,075				(15,152			)	(13,605			)
Net earnings (loss) from discontinued operations		—				(505			)	—				69,510
Net earnings (loss)		$		(2,904	)	$		570		$		(15,152	)	$		55,905
Other comprehensive income (loss):
Foreign currency translation adjustments, net of taxes of $nil		383				693				339				425
Comprehensive earnings (loss)		$		(2,521	)	$		1,263		$		(14,813	)	$		56,330
Basic and diluted net earnings (loss) per share attributable to the Company’s common shareholders (in dollars)
Continuing operations		$		(0.09	)	$		0.03		$		(0.48	)	$		(0.44	)
Discontinued operations		0.00				(0.01			)	0.00				2.26
		$		(0.09	)	$		0.02		$		(0.48	)	$		1.82
Weighted average number of shares outstanding (in thousands)
Basic		31,582				30,688				31,429				30,717
Diluted		31,582				31,176				31,429				30,717

SIERRA WIRELESS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars)

(unaudited)

		September 30, 2014				December 31, 2013
Assets
Current assets
Cash and cash equivalents		$	196,086			$	177,416
Short-term investments		—				2,470
Accounts receivable, net of allowance for doubtful accounts of $2,402 (December 31, 2013 - $2,279)		109,428				112,490
Inventories		10,766				8,253
Deferred income taxes		3,713				2,391
Prepaids and other		10,183				28,741
		330,176				331,761
Property and equipment		19,993				21,982
Intangible assets		41,456				43,631
Goodwill		105,961				102,718
Deferred income taxes		5,257				7,176
Other assets		4,480				4,732
		$	507,323			$	512,000
Liabilities
Current liabilities
Accounts payable and accrued liabilities		$	124,722			$	124,846
Deferred revenue and credits		3,519				2,481
		128,241				127,327
Long-term obligations		25,445				21,550
Deferred income taxes		572				127
		154,258				149,004
Equity
Shareholders’ equity
Common stock: no par value; unlimited shares authorized; issued and outstanding 31,673,081 shares (December 31, 2013 - 31,097,844 shares)		337,148				329,628
Preferred stock: no par value; unlimited shares authorized; issued and outstanding: nil shares		—				—
Treasury stock: at cost 342,645 shares (December 31, 2013 – 507,147 shares)		(6,236		)		(5,137		)
Additional paid-in capital		24,457				25,996
Retained earnings		4,215				19,367
Accumulated other comprehensive loss		(6,519		)		(6,858		)
		353,065				362,996
		$	507,323			$	512,000

SIERRA WIRELESS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(unaudited)

			Three months ended September 30,										Nine months ended September 30,
			2014					2013					2014					2013
Cash flows provided by (used in):
Operating activities
Net earnings (loss)			$		(2,904	)		$		570			$		(15,152	)		$		55,905
Items not requiring (providing) cash
Amortization			6,009					6,873					18,429					21,150
Stock-based compensation			2,395					2,481					6,972					7,170
Gain on sale of AirCard business			—					17					—					(94,078			)
Deferred income taxes			(2,373			)		(770			)		592					17,194
Loss (gain) on disposal of property and equipment			(15			)		10					7					(10			)
Impairment			—					—					3,756					1,012
Other			4,606					(1,912			)		4,950					(1,399			)
Taxes paid related to net settlement of equity awards			(225			)		(14			)		(899			)		(342			)
Changes in non-cash working capital
Accounts receivable			(4,624			)		15,877					(6,833			)		28,862
Inventories			(552			)		51					(1,711			)		12,604
Prepaid expenses and other			14,501					(2,767			)		22,948					(11,870			)
Accounts payable and accrued liabilities			11,533					(824			)		3,471					(15,079			)
Deferred revenue and credits			307					(512			)		(75			)		485
Cash flows provided by operating activities			28,658					19,080					36,455					21,604
Investing activities
Additions to property and equipment			(1,983			)		(3,835			)		(5,625			)		(9,730			)
Proceeds from sale of property and equipment			25					—					62					32
Increase in intangible assets			(288			)		(555			)		(1,373			)		(1,669			)
Net proceeds from sale of AirCard business			—					(17			)		13,800					119,978
Acquisition of In Motion Technology, net of cash acquired			(1,397			)		—					(23,853			)		—
Net change in short-term investments			—					4,779					2,470					(5,221			)
Increase in other assets			(264			)		—					(3,554			)		—
Cash flows provided by (used in) investing activities			(3,907			)		372					(18,073			)		103,390
Financing activities
Issuance of common shares			1,392					1,186					4,764					4,947
Repurchase of common shares for cancellation			—					—					—					(5,772			)
Purchase of treasury shares for RSU distribution			—					(3,433			)		(5,955			)		(3,433			)
Decrease in other long-term obligations			(46			)		(108			)		(317			)		(827			)
Cash flows provided by (used in) financing activities			1,346					(2,355			)		(1,508			)		(5,085			)
Effect of foreign exchange rate changes on cash and cash equivalents			1,571					(450			)		1,796					(335			)
Cash and cash equivalents, increase in the period			27,668					16,647					18,670					119,574
Cash and cash equivalents, beginning of period			168,418					166,573					177,416					63,646
Cash and cash equivalents, end of period			$		196,086			$		183,220			$		196,086			$		183,220

SIERRA WIRELESS, INC.

RECONCILIATION OF GAAP AND NON-GAAP RESULTS

(in thousands of U.S. dollars, except where otherwise stated)
		2014														2013
		Q3				Q2				Q1						Total				Q4				Q3				Q2				Q1
Gross margin - GAAP		$		47,055		$		43,321		$		38,597				$		145,641		$		38,443		$		37,346		$		36,474		$		33,378
Stock-based compensation and related social taxes		134				130				160						406				119				117				95				75
Gross margin - Non-GAAP		$		47,189		$		43,451		$		38,757				$		146,047		$		38,562		$		37,463		$		36,569		$		33,453
Earnings (loss) from operations - GAAP		$		2,943		$		(6,264	)	$		(6,672	)			$		(17,664	)	$		(3,547	)	$		(3,301	)	$		(3,932	)	$		(6,884	)
Stock-based compensation and related social taxes		2,402				2,326				3,304						7,990				2,177				2,145				2,013				1,655
Acquisition and integration		356				71				970						535				369				139				—				27
Restructuring		71				987				—						171				14				14				26				117
Impairment		—				3,756				—						280				—				—				—				280
Acquisition related amortization		2,609				2,784				3,118						13,741				3,580				3,405				3,363				3,393
Earnings (loss) from operations - Non-GAAP		$		8,381		$		3,660		$		720				$		5,053		$		2,593		$		2,402		$		1,470		$		(1,412	)
Amortization (excluding acquisition related amortization)		3,400				3,153				3,365						13,649				3,566				3,468				3,403				3,212
Adjusted EBITDA		$		11,781		$		6,813		$		4,085				$		18,702		$		6,159		$		5,870		$		4,873		$		1,800
Net earnings (loss) from continuing operations - GAAP		$		(2,904	)	$		(8,243	)	$		(4,005	)			$		(15,550	)	$		(1,945	)	$		1,075		$		(6,742	)	$		(7,938	)
Stock-based compensation and related social taxes, restructuring, impairment, acquisition, integration, and acquisition related amortization, net of tax		5,414				9,916				7,389						22,620				6,112				5,760				5,393				5,355
Unrealized foreign exchange loss (gain)		7,953				916				(382			)			(3,912			)	(1,970			)	(2,457			)	(1,359			)	1,874
Income tax adjustments		(2,781			)	1				(2,519			)			3,784				925				(895			)	3,754				—
Net earnings (loss) from continuing operations - Non-GAAP		$		7,682		$		2,590		$		483				$		6,942		$		3,122		$		3,483		$		1,046		$		(709	)
Net earnings (loss) from discontinued operations - GAAP		$		—		$		—		$		—				$		70,588		$		1,078		$		(505	)	$		68,152		$		1,863
Stock-based compensation and disposition costs		—				—				—						4,014				3				1,402				876				1,733
Gain on sale of AirCard business		—				—				—						(70,182			)	(1,056			)	(49			)	(69,077			)	—
Net earnings (loss) from discontinued operations - Non-GAAP		$		—		$		—		$		—				$		4,420		$		25		$		848		$		(49	)	$		3,596
Net earnings (loss) - GAAP		$		(2,904	)	$		(8,243	)	$		(4,005	)			$		55,038		$		(867	)	$		570		$		61,410		$		(6,075	)
Net earnings (loss) - Non-GAAP		7,682				2,590				483						11,362				3,147				4,331				997				2,887
Diluted net earnings (loss) from continuing operations per share
GAAP - (in dollars)		$		(0.09	)	$		(0.26	)	$		(0.13	)			$		(0.50	)	$		(0.06	)	$		0.03		$		(0.22	)	$		(0.26	)
Non-GAAP - (in dollars)		$		0.24		$		0.08		$		0.02				$		0.23		$		0.10		$		0.11		$		0.03		$		(0.02	)
Diluted net earnings (loss) per share
GAAP - (in dollars)		$		(0.09	)	$		(0.26	)	$		(0.13	)			$		1.79		$		(0.03	)	$		0.02		$		2.00		$		(0.20	)
Non-GAAP - (in dollars)		$		0.24		$		0.08		$		0.02				$		0.37		$		0.10		$		0.14		$		0.03		$		0.09

SIERRA WIRELESS, INC.

SEGMENTED RESULTS

(in thousands of U.S. dollars, except where otherwise stated)
		Three months ended September 30									Nine months ended September 30
		2014				2013					2014				2013
OEM Solutions
Revenue		$	124,329			$	95,850				$	347,070			$	280,158
Cost of goods sold		87,453				66,395					245,997				194,531
Gross margin		$	36,876			$	29,455				$	101,073			$	85,627
Gross margin %		29.7%				30.7%					29.1%				30.6%
Enterprise Solutions
Revenue		$	18,941			$	16,412				$	52,375			$	43,094
Cost of goods sold		8,762				8,521					24,475				21,523
Gross margin		$	10,179			$	7,891				$	27,900			$	21,571
Gross margin %		53.7%				48.1%					53.3%				50.1%