Hold off on Sierra Wireless (Sierra Wireless Stock Quote, Chart, News TSX:SW), says National Bank Financial analyst Richard Tse, who reviewed the company’s latest quarter in an update to clients on November 12. Tse said with Sierra’s shift towards a more IoT-focused business still a multi-year process-in-the-making, caution should be the name of the game.
Sierra Wireless makes mobile computing and IoT communications products to connect devices and applications over cellular networks, offering wireless modems, routers and software and services for companies bringing their wireless application services to market. The company released its third quarter 2020 financials on November 12, with revenue up 3.6 per cent year-over-year to $180.3 million and an adjusted EPS loss of $0.19 per share. (All figures in US dollars except where noted otherwise.)
Sierra’s IoT revenue was down 15.4 per cent year-over-year to $79.1 million, with the company pointing to a slide to lower hardware sales in Enterprise gateway products and IoT Solutions modules. Revenue from the company’s Embedded Broadband segment, excluding its automotive business which the company is in the midst of divesting, was $34.3 million for the Q3, down 20.8 per cent year-over-year. Recurring and other services revenue was $29.8 million and Product revenue was $83.6 million. The company finished the quarter with short-term borrowings and long-term debt of $34.4 million versus $15.0 million at the end of the second quarter.
Management said the close of the sale of its automotive business, announced in July of this year, would occur sometime in the Q4, with proceeds expected to be about $140 million. Looking ahead, Sierra said COVID-19-related disruptions are still keeping it from providing guidance but that the company is nonetheless “seeing continued business improvements” and has started reducing operating expenses by between $25 and $30 million on an annualized basis by scaling back its R&D facilities in Hong Kong, in aid of improving earnings and cash flows.
“Our Continuing Operations in the Third Quarter, excluding the Automotive product line being divested, improved sequentially with Recurring and Other Services revenue up 11 per cent sequentially and 22 per cent year-over-year,” said Kent Thexton, President and CEO, in a press release. “Going forward, we are improving the Company’s operating efficiency and we have announced and are implementing a series of cost reduction initiatives.”
On the Q3 numbers, Tse said the $180-million topline was above his $151-million estimate as well as the consensus $159 million, while the adjusted EPS loss of $0.19 per share was also better than his estimated loss of $0.23 per share and the Street’s loss of $0.15 per share.
Tse said while it’s still early days in the company’s pivot to IoT services, continued year-over-year declines in the segment “has us maintaining a cautious view, particularly under the uncertain economic backdrop.”
“With some potential confusion in the results care of the pending divestiture of the Company’s auto segment, we’d call the continuing operating results for Sierra Wireless as below expectations with the IoT segment posting its fifth consecutive quarter of negative year-over-year growth, around -15.4 per cent in Q3 care of COVID-related delays and continued supply chain challenges. Bottom line, that performance combined with a company that’s very early in a multi-year growth transition has us sticking to the sidelines,” Tse wrote.
With the update, Tse maintained his “Sector Perform” rating and $13.00 target price, which at the time of publication represented a projected one-year return of 20.4 per cent. Tse’s target now implies a valuation of 0.8x EV/Sales on his fiscal 2021 estimates whereas it was 0.6x previously. Tse is calling for 2020 revenue and adjusted EPS of $530.6 million and negative $1.16 per share, respectively, and for 2021 revenue and adjusted EPS of $489.8 million and $0.53 per share, respectively.
After seeing share price declines for a couple of years, Sierra has had an up-and-down but overall positive stretch in 2020. Year-to-date, the stock is currently up 19 per cent.
Last week, Sierra announced that its Octave all-in-one edge-to-cloud solution for industrial IoT won an “IoT Innovation of the Year” award in the fourth annual Mobile Breakthrough Awards, run by Mobile Breakthrough, an independent market intelligence organization. Sierra said Octave is built on the company’s 25 years of experience to deliver effective ways for original equipment manufacturers (OEMs) and industrial companies to access data in the cloud.
“Octave eliminates the complexities of implementing and scaling IoT solutions, allowing industrial companies to cost-effectively access the benefits of IoT without the risks,” said Olivier Pauzet, Vice President, Product & IoT Solutions, in a press release. “With Octave, customers can focus on building their business rather than reinventing technical infrastructure, dramatically reducing costs and development time for OEMs, system integrators and enterprises.”