Sierra Finds Demand for Its Wireless Modems

The company specializes in wireless modems for laptops. They're currently the best of a bad set of possibilities for people who want go-anywhere Internet access. That other main choice, Wi-Fi, depends upon the user finding a coffee shop, library or hotel where it's offered, and then, often, opening an account and buying a block of time. A wireless modem can be used anywhere there's a cellphone signal. Plug-in models allow the user to switch carriers without changing laptops. Increasingly, those fit into USB ports, which nearly all laptops have, rather than dedicated ports found on only some of them.

Several months ago I bought Sierra Wireless's AirCard 875U, served by AT&T (T), after seeing a PC Magazine review that named it "Editors Choice" (and after enduring a tragicomic 24 hours of poor customer service from Sprint (S) with its version of the card). The review's bottom line: The "dongle may stick out awkwardly from your PC, but it also provides the best high-speed connectivity available on AT&T Wireless." That about sums it up: best available. It's too slow for things like web video and it doesn't work well inside big buildings — at my desk, for example. But it's fine for the basic web access I need to write columns while I'm traveling or waiting an hour at a TV network before going on for a five-minute segment. And it's fairly cheap. The card cost me $50 and unlimited service runs $60 a month with a two-year commitment.

The low price is due to subsidies. Wireless carriers are facing declining revenues per user in their saturated voice businesses and so are eager to gain share in data service. At the start of 2005 wireless cards for laptops cost $150 to $200. Now some are free with service contracts. One carrier, Sprint, is testing a $30-a-month service plan.

The good reviews and carrier subsidies have been a boon for Sierra Wireless, which last year collected 71% of sales from plug-in modems, 20% from embedded ones and the rest from industrial ones used in truck fleets, wireless sales registers and more. In the company's first quarter, sales jumped 66% year-over-year to $141.9 million. Earnings rose to 31 cents a share from 20 cents. Analysts say competition is heating up for embedded modems but that Sierra took market share for plug-in ones from competitors like Novatel Wireless (NVTL) during the quarter.

Worries loom, though. Novatel might respond to Sierra's success by cutting prices. Big cellphone manufacturers might decide the laptop card business is now big enough to deserve their attention. A shift to new technology might leave Sierra in a less competitive position. Sprint is spending billions of dollars on a new kind of network called WiMax, expected to launch later this year and reach broad coverage by 2010. It promises speed and range that together best both Wi-Fi and today's fast cellular networks. While Sierra is expected to make WiMax products, it wasn't announced among an initial list of vendors.

Sierra Wireless came to my attention via a Price/Sales screen. To see the seven other survivors click here, or run the search for yourself using the full list of criteria and SmartMoney's stock screener.

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