Numerex BUY Target Price $15

NMRX : NASDAQ : US$10.12
BUY 
Target: US$15.00

COMPANY DESCRIPTION:
Numerex is a leading provider of machine-to-machine
(M2M) business services, technology, wireless network
connectivity, and products used in the development and
support of M2M solutions for enterprise and government
markets worldwide.

Technology — Communications Technology — Wireless Equipment
STRONG Q1/14 RESULTS: INCREASING ADJUSTED
EBITDA ESTIMATES AND UPGRADING TO BUY
Investment recommendation:

Numerex reported Q1/14 results with
adjusted EBITDA of $2.8M, above our $2.2M estimate. Management’s 2014
guidance for recurring revenue of $68M to $70M including the recent
Omnilink acquisition was consistent with to slightly above our $63M estimate
excluding Omnilink. We maintain our belief Numerex’s vertically integrated
Device Network Application (DNA) M2M offering and focus on higher value
managed services deals positions the company for strong long-term growth
trends in leading M2M verticals such as security, supply chain, remote tank
and bin monitoring, emergency response, and asset tracking. We believe an
increasing mix of high-margin recurring services revenue should drive solid
subscription revenue growth, increased ARPU, operating leverage, and
expanding EBITDA margins. While we maintain our $15 price target, we
upgrade to BUY given our belief the shares are undervalued relative to the
company’s growth and expanding adjusted EBITDA margins.
Investment highlights
 Numerex reported Q1/14 recurring and hardware revenue of $13.9M
and $6.9M, respectively, versus our $13.8M/$7.8M estimates. While
hardware revenue tends to be lumpy by quarter, hardware gross margin
of 19.1% was well above our 13% estimate. Total subscribers of 2.26M
exiting Q1/14 were consistent with our expectations.
 With the Omnilink acquisition, Numerex will add roughly 30K
subscribers that generate roughly $25 ARPUs. We believe Omnilink fits
well with Numerex’s managed services strategy and focus to increase
ARPUs and should be modestly accretive to 2014 adjusted EBITDA.
 We believe an expanding deal pipeline for managed services combined
with our expectations for continued healthy subscriber growth trends
position Numerex for strong long-term recurring revenue growth and
expanding margins. We model adjusted EBITDA margins expanding
from 10.7% in 2013 to 12.0% in 2014 to 16.2% in 2015.
 We are maintaining our 2014 adjusted EBIDTA estimate of $11.5M and
increasing our 2015 estimate from $18.5M to $19.7M.
Valuation: Our $15 price target is based on shares trading at roughly 14x
EV/EBITDA, based on our 2015 adjusted EBITDA estimate.

Veeco Instruments SELL

VECO : NASDAQ : US$30.59
SELL 
Target: US$22.00

COMPANY DESCRIPTION:
Veeco Instruments manufactures process equipment and instrumentation for the LED, solar, data storage, wireless,
semiconductor and scientific research markets. Veeco’s manufacturing and engineering facilities are located in New York, New Jersey, California, Colorado, Arizona and Minnesota, and sales offices are found globally.

Investment highlights
 Our current rating is in-line with our bearish view that there is limited upside for both MOCVD equipment names.
 Now that the company is current we have seen the expected negative effect on Veeco’s margins due to price competition and lack of a bubble-type spending environment which we do not believe will be repeated. We do not envision that pricing will materially recover over the next investment cycle, continuing to weigh on margins.
 While we are bullish on the SSL secular trend, we believe expectations for both Veeco and AIXTRON are not in-line
with the new normal of a 200-400 annual tool market.
 We see some potential upside from Synos; however, this technology is still nascent and we harbor concerns about the increase in OPEX to support this and other new initiatives.
 We believe that fundamental downside exists in VECO shares, despite investor enthusiasm on the secular trend.
Given the risks of a slower MOCVD cycle and limited earnings power we would advise investors put money downstream for exposure to the LED macro.

Sierra Wireless Update Buy

SWIR : NASDAQ : US$17.12
BUY 
Target: US$20.00

COMPANY DESCRIPTION:
Sierra Wireless, Inc. provides wireless solutions for the mobile computing and machine-to-machine (M2M) markets.
All amounts in US$ unless otherwise noted.

Technology — Communications Technology — Wireless Equipment
WELL POSITIONED LONG-TERM FOR STRONG M2M SALES, BUT SLIGHTLY SLOWER NEAR-TERM GROWTH
Investment recommendation

Sierra Wireless announced solid Q3/13 results with sales consistent with our estimates and earnings above our estimates due to solid gross margin and expense controls yielding leverage along with a one-time tax recovery. However, Q4/13 guidance excluding the AnyDATA acquisition was below our expectations due to a weaker European macro impacting the OEM division. Despite these trends, our long-term thesis is unchanged.

We believe Sierra is well positioned to benefit from strong long-term industry growth rates for the M2M market given strong global trends in Sierra’s core automotive, networking, energy, and sales & payment verticals and our belief Sierra’s automotive OEM sales growth will reaccelerate in 2H/14. In addition, we anticipate continued faster growth for Sierra’s higher margin Enterprise Solutions and believe management will soon deploy some of its $190M in cash as they continue to evaluate margin-accretive acquisition targets that could drive additional growth and leverage. We reiterate our BUY rating, but lower our price target to $20 due to the slower near-term growth reflected in our estimates.
Investment highlights
 Sierra Wireless reported Q3/13 revenue of $112.3M and pro forma EPS of $0.11 versus our $113M/$0.06 estimates. Enterprise Solutions sales were $16.4M and OEM Solutions sales were $95.9M versus our $15.1M/ $97.9M estimates. Due to very strong higher-margin Enterprise sales (up 38% Y/Y) versus our estimates that offset slower module sales, non-GAAP gross margin of 33.4% increased 330 bps Y/Y.
 Q4/13 guidance midpoints of $114M in sales and $0.09 pro forma EPS were well below our $121.5M/$0.12 estimates, even when removing $2M in AnyDATA sales that were included in our prior estimates. Management guided to a similar gross margin and operating expense levels to Q3/13 and we anticipate leverage on the modest sales growth.
October 13 we noted “Well positioned for M2M growth trends in 2014/15; AnyDATA acquisition adds new customers and channels”  thus our unchanged long-term thesis.
 With strong Q3 results offsetting Q4 guidance, our 2013 pro forma EPS est. remains $0.20; we lower 2014/15 from $0.72/$1.25 to $0.55/$1.12.
Valuation:

Our $20 price target is based on shares trading at roughly 7x our 2015 EV/EBITDA estimate

Numerex Raising Target Price to $18

NMRX : NASDAQ : US$11.92
BUY 
Target: US$18.00

COMPANY DESCRIPTION:
Numerex is a leading provider of machine-to-machine (M2M) business services, technology, wireless network
connectivity, and products used in the development and support of M2M solutions for enterprise and government
markets worldwide.

Technology — Communications Technology — Wireless Equipment
STRONG Q3/13 RESULTS, WELL POSITIONED FOR LONG-TERM M2M GROWTH
Investment recommendation

Numerex reported strong Q3/13 results with 31% Y/Y subscriber growth, slightly higher Q/Q ARPU, and improved
subscription gross margins consistent with our estimates. Additionally, hardware sales – a precursor to future recurring revenue growth – beat our estimate.

Following disappointing Q2/13 results, the strong Q3/13 results,management’s reiteration of its 30-35% Y/Y subscription growth and 18- 23% recurring revenue growth guidance ranges for 2013, and our expectations for higher ARPU managed services contracts to ramp during 2014 increase our confidence in our strong 2015 estimates.

We maintain our belief Numerex’s vertically integrated Device Network Application (DNA) M2M offering is well positioned in key M2M verticals such as security, remote monitoring, and asset tracking. Further, we believe an increasing mix of high-margin recurring services revenue should drive accelerating 2014 subscription revenue growth, increased ARPU, operating leverage, and expanding EBITDA margins. We reiterate our BUY rating and increase our price target from $15 to $18 due to our introduced 2015 estimates.
Investment highlights
 Numerex reported Q3/13 recurring and hardware revenue of $13.5M and $8.5M, respectively, vs. our  13.5M/$6.7M estimates. Subscribers totaled 2.31M exiting Q3/13, up 31% Y/Y, or consistent with our
estimates. Further, comparable recurring revenue gross margins of 56.0% improved 140 bps Q/Q with increased scale and improved operational efficiencies. We believe these improvements are sustainable.
 We believe an expanding deal pipeline and strong subscriber growth positions Numerex for healthy long-term recurring revenue growth and expanding margins. In fact, we are modeling adjusted EBITDA margins expanding from 8.7% in 2013 to 17.1% in 2014 and 24.3% in 2015.
 Due to slightly lower hardware sales, we lower our 2014 pro forma EPS estimate from $0.85 to $0.73. We introduce our 2015 estimate of $1.30.
Valuation

Our $18 price target is based on shares trading at roughly 12x EV/EBITDA, based on our 2015 adjusted EBITDA estimate.