National Bank Financial cools on Sierra Wireless; cuts target

The long term outlook may look fine for Sierra Wireless (Sierra Wireless Stock Quote, Chart, News TSX:SW) but forget about the short and medium term, says National Bank Financial analyst Richard Tse, who in an update to clients on Tuesday reviewed the company’s latest quarterly results.

Shares of Sierra Wireless were down markedly in trading on Wednesday, which develops mobile computing and Internet of Things communication products for connecting devices across cellular networks.

The company released its third quarter 2019 financials on Tuesday, with revenue coming in at $174.0 million, down from $203.4 million a year earlier, and posting a net loss of $20.2 million or $0.56 per diluted share versus a net loss of $1.0 million or $0.03 per diluted share in Q3 of 2018. (All figures in US dollars unless where noted otherwise.)

“We continue to make strong progress on our transformation to an integrated IoT Solutions company,” said Kent Thexton, President and CEO, in a press release. “We had a record quarter in new recurring services wins and our services pipeline is growing. In addition, we are continuing to drive greater efficiencies in our business under our two-year cost reduction program.”

The quarter turned out to be a miss when compared to analysts’ estimates. The $174.0-million top line was lower than the consensus call for $191 million as well as Tse’s expected $192 million, while the adjusted EPS of $0.03 per share was lower than the Street’s $0.11 per share and Tse’s $0.06 per share.

National Bank Financial cuts target on Sierra Wireless from $12.50 to $11.00…

Tse said that as bad as those numbers were, management’s guidance was more disappointing, where Sierra is calling for fourth quarter revenue of $169 million, by Tse’s calculation, resulting in a year-over-year decline of 16 per cent (compared to a decline of 14 per cent in Q3). EBITDA margins, again by Tse’s calculation, are predicted to drop to 2.8 per cent from 3.6 per cent in the third quarter.

Tse says the problems stem from challenges intrinsic to markets like the automotive sector as well as a slower-than-expected pickup in the company’s IoT segment.

“We believe execution is the biggest risk to this name, despite the potential opportunities in IoT,” writes Tse. “With the company targeting $1 billion in revenue in three years with 60 per cent coming from IoT, that would appear to translate to reasonable annual growth rate of 15 per cent but at this point, it’s ways out. With respect to recurring revenue in the quarter, it was up 6.7 per cent.”

“The bottom line is this – while Sierra Wireless reiterated its long-term goal of achieving $200 million in recurring revenue by 2022 and $400 million by 2024, it’s still way too early to call and despite some positive momentum in the pipeline, there’s also a fair degree of risk. In light of that, we’d stay clear of SW/SWIR for now,” he says.

With the report, Tse is maintaining his “Sector Perform” rating but dropping his target price from $12.50 to $11.00, representing a projected 12-month return of negative two per cent at the time of publication.