National Bank Financial cuts price target on Sierra Wireless

After what he describes as worse than expected fourth quarter results, National Bank Financial analyst Richard Tse has cut his price target on Sierra Wireless.

On Wednesday, Sierra Wireless reported its Q4 and fiscal 2018 results. In the fourth quarter, the company posted Adjusted EBITDA of $15.3-million on revenue of $201.4-million, a topline that was up 9.7 per cent over the same period last year.

“We are accelerating the transformation of the company into a global IoT solutions and services provider. We are centralizing our R&D, combining our global sales team and driving efficiency programs throughout our operations,” CEO Kent Thexton said. “As we deliver cost savings, we are investing today in innovative cellular technologies to enhance our Device To Cloud offering and drive recurring subscription-based revenue. To accomplish this, we are developing innovative technologies such as edge network software, soft-SIM capabilities, LPWA and 5G embedded modules, as well as advanced security for data management. We plan to leverage our strong device position into the mass deployment of LPWA Cat M1/NB1 this year and the roll-out of high-speed 5G technology over the next couple of years. We have much to accomplish in 2019 and I believe the company is making the right investments as we enter the next phase of global growth in the Internet of Things.”

Tse says investors should stick to the sidelines with this name.

“Sierra Wireless reported lower-than-expected Q4 results; but even worse was guidance for fiscal 2019 which came in well below our already conservative expectations,” the analyst said. “The reason – a combination of soft end markets and perhaps more troubling a miss in design cycles has put the Company back a year in some market segments. All that had Sierra Wireless refocusing investors on a restructuring to surface efficiencies while investing to accelerate the Company’s shift to recurring services which has been long overdue. The reality is that the scale of investment required to support that shift will outpace the savings from efficiencies in 2019; as such, investors will need to look to 2020 to assess that execution when it comes to those moves surfacing operating leverage. That’s a long way off even with a valuation pullback. So while the aspirational goals could be promising, we continue to believe that investors should stay on the sidelines until the dust settles.”

In a research update to clients today, Tse maintained his “Sector Perform” rating, but lowered his one-year price target on Sierra Wireless from (US) $18.00 to $12.00, implying a return of two per cent at the time of publication.

Tse thinks Sierra Wireless will post EBITDA of (US) $34.4-million on revenue of $791.2-million in fiscal 2019. He expects those numbers will improve to EBITDA of $56.8-million on a topline of $897.5-million the following year.