Sierra Wireless Inc.

 

Sierra makes wireless modules and gateways for wireless connectivity to various devices and they provide cloud based connectivity services to OEMs and enterprises around the world.  They are experiencing growth in automotive customers but much of that growth is still to come.  The company has experienced periods of strong growth and retrenchment and it appears the recent period of retrenchment might be in the rear-view mirror.   

Ests:     3Q19   4Q19   FY19    FY20

Revs    191m   198      754m   832

EPS      .11       .16       0.32     0.78

 

P=C$14.85 U.S.$11.28, cash net of def revs=2.15sh, excess WC=0.63/sh, TTM EPS 0.08,, ex cash P/E=114X, 13X FY20 estimate

 

3Q19   .03 vs .29 -90%, est .11

  • Nov 5, 2019, P= C$14.85 U.S.$11.28, TTM EPS 0.08,, ex cash P/E=114X, 13X FY20 estimate

  • Revs -14.5% to 174m, GM 31.7% vs 33.1%, OpEx 53.3m vs 56.5m, OpInc 1.8m vs 10.9m, EBITDA 6.3m vs 16m

  • IoT -2.1% to 93.4m, GM 37.7% vs 37.8%, Embedded Broadband -25.3% to 80.6m, GM 24.7% vs 28.9% (weaker mobile computing, networking, and automotive)

  • Ex sale of iTank last Dec, Services +5% y/y, Subscription services +7% but q/q Services -1.6%

  • FY19 Guidance: Revs 708-712m (-11% to -10%), adj EBITDA 23m, EPS 0-.03, materially below previous expectations.  IoT to be +3-4%, Embedded Broadband down 22-23%

  • Implies weak 4Q: Revs -16% to -14% to 169-173m, EBITDA 4.3m vs 15.3m, EPS (.08)-(.05)

  • Acquiring M2M for 19.8m, TTM Revs 17.9m, 9.2m was subscription, mgmt. expects it to be accretive to earnings immediately, expect closing in early 2020.

  • LTV of recurring service wins in 3Q19 more than double 2Q19, YTD +170% y/y, mgmt. says on target to achieve $400-450m LTV wins in FY19

  • YTD added ~300k new connected devices, now at almost 3.5m (+9% from end of FY18)

  • Seeing some delays on upgrades to 4G as 3G sunset extended, also seeing excess inventory in NA distribution channel and saw lower demand from a telematics gateway customer in Asia, some delays in high-volume auto programs, competition from low-cost modules, 

  • Mgmt discussed how their all in 1 cloud solution, Octave, simplifies and de-risks cloud deployments and reduces deployment from months to days.  

  • Mgmt sees doubling annualized run rate of $100m service revenues in 3 years then another double in 2 years (to $400m in 5 years but it was only +7% y/y in 3Q)

  • Results and guidance are pathetic, stock getting hammered after hours.

2Q19   .07 vs .27, est .05

  • July 31, 2019, P=C$15.57 U.S.$11.78, TTM EPS 0.59, ex cash P/E=16X, 13X FY20 estimate

  • Revs -5% to 191.4m, GM 30.8% vs 34.4%, OM 1.8% vs 5.2%, OpInc -67%, OpEx 55.6m vs 44.9m in 1Q, EBITDA 7.9m vs 15.6m

  • IoT +6.3% to 99.1m, GM 37.2% vs 36.8%, Embedded Broadband -15.1% to 99.2m, GM 24% vs 32.3%

  • Seeing weaker global auto demand, some delays in new auto launches, partly offset by growth in higher margin IoT solutions, now expect 12% growth in FY19 vs 10% previously expected

  • Strong subscriber growth, record activations of smart SIM, 

  • FY19 Guidance: Revs slightly lower y/y, EBITDA and EPS still expected to be ~35m and .30-.35

  • YTD EBITDA 12.4m, Guidance implies for 2H: Revs slightly up y/y, EBITDA 22.6m vs 31.3m, EPS .25-.30 vs .54, mgmt expects 3Q revs flat q/q (-6% y/y) which indicates 4Q could be +16% y/y

  • Encouraging to see q/q and y/y improvement in IoT GM, FY guidance points to continued 2H improvement vs 1H.

  • Expect to double recurring revenue to $200m within next 3 years then to $400m within the next 2 years.  

1Q19   (.02) vs .09, est (.05) down from .21

  • July 31, 2019, P=C$15.57 U.S.$11.78, TTM EPS 0.59, ex cash P/E=16X, 13X FY20 estimate

  • Revs -5% to 191.4m, GM 30.8% vs 34.4%, OM 1.8% vs 5.2%, OpInc -67%, OpEx 55.6m vs 44.9m in 1Q, EBITDA 7.9m vs 15.6m

  • IoT +6.3% to 99.1m, GM 37.2% vs 36.8%, Embedded Broadband -15.1% to 99.2m, GM 24% vs 32.3%

  • Seeing weaker global auto demand, some delays in new auto launches, partly offset by growth in higher margin IoT solutions, now expect 12% growth in FY19 vs 10% previously expected

  • Strong subscriber growth, record activations of smart SIM, 

  • FY19 Guidance: Revs slightly lower y/y, EBITDA and EPS still expected to be ~35m and .30-.35

  • YTD EBITDA 12.4m, Guidance implies for 2H: Revs slightly up y/y, EBITDA 22.6m vs 31.3m, EPS .25-.30 vs .54, mgmt expects 3Q revs flat q/q (-6% y/y) which indicates 4Q could be +16% y/y

  • Encouraging to see q/q and y/y improvement in IoT GM, FY guidance points to continued 2H improvement vs 1H.

  • Expect to double recurring revenue to $200m within next 3 years then to $400m within the next 2 years.   

4Q18   .25 vs .28, -11%, est .26 down from .32, FY18 EPS .90 vs 1.04, -13%

  • Feb 13, 2019, P=C$20.58 U.S.$15.50, TTM EPS 0.90, ex cash P/E=15X, FY19 P/E 44X off their guidance

  • Revs +9.7% to 201.4m, product +5.3% to 178.2m, services +63% to 23.2m, GM 32.7% vs 33.8%, OpEx 55.7m, OM 5.1% vs 5.2%, OpInc +7.9% to 10.2m, EBITDA 15.3m vs 13.9m, EPS down due to tax, FY EBITDA 55.9m vs 54.7m

  • OEM +6.4% to 148.7m, GM 27.1% vs 29.7%, Enterprise -5.1% to 30.3m, GM 51.6% vs 47.5%, IoT Services +89% to 22.4m, GM 44.6% vs 44.2% (q/q Enterprise GM hit by tariffs)

  • OEM had growth in in transportation, energy, and industrial, and lower sales in mobile computing and sales and payment (explaining lower GM y/y)

  • Guidance: 1Q19 Revs 170-174m -9 to -7%, est 208m, EPS (06)-(02), est .21

  • FY19 Revs Flat, GM 31.5-32% (vs 33.3%) EBITDA ~35m (vs 55.9m), EPS ~.30 (est 1.20), guidance implies increased $8-12m spending, accounts for 0.20-0.30/share of EPS shortfall.

  • 1Q Guidance impacted by shortage of Intel processors, auto customers working down inventory, lower demand from networking, and some macro headwinds.

  • Guidance is atrocious. Mgmt says accelerating transformation, centralizing R&D, combining global sales team.  Ramping investment spending then cutting costs.

  • For FY19 expect weakness in PC OEM due to share loss, masking expected strong growth in “highest value part of our business” – higher margin hardware and recurring revenues.  Expect solid growth in automotive, Gateway and Routers expected to grow at similar rate to 18% achieved in FY18, IoT services expected to grow high single digits ex sold iTank business

  • “need to move faster to capture strong share of this IoT growth opportunity” – investing in key product technologies to enhance Device to Cloud offerings (which will reduce profitability in the near-term) and implementing efficiency and cost reduction programs to fund the investments (reduce COGS and OpEx by $40-50m or 5-7% over 18-24 months so timing of benefits does not match cost of investments), cuts could potentially contribute $.80-1.20/share in earnings once fully effected.  

  • Centralized 3 R&D centres into 1 to drive efficiency and focus on improved execution.  Centralized product management for integrated approach to provide end-customer solutions. Ops team working with suppliers and manufacturers to improve efficiency and cost.  

  • Investments include developing intelligent edge software capabilities to improve data management between cloud and the edge, enhance global embedded software initiative (Ready-to-Connect), designing 5G modules, increasing security capabilities. Also investing in sales systems and people.

  • Previous strategy focused on automotive and neglected investment in mobile computing and networking, experiencing share loss until the next cycle of 5G designs – high margin so more pain.

  • Sounds like mobile and networking was slightly less than 50% of revs in FY – the other part of the business expect growth >10% in FY19

  • Doing exactly the opposite of what I expected, rather than returning to growth, SW still hasn’t escaped their history of shitting the bed on profitability after a stretch of good results to then cut costs and claw their way back out. 

  • In 3-4 years, target revs well >$1bn with ~60% coming from IoT Solutions and Services with GM >40%, could be back above $1 a share in earnings power by 2020-2021 

3Q18   .29 vs .24, +21%, est .26

  • Nov 8, 2018, P=C$25.85 U.S.$19.72, TTM EPS 0.91, ex cash P/E=20X, FY19 P/E=14X

  • Revs +17.9% to 203.4m, product +11.1% to 179.4m, Services +118% to 24m, GM 33.1% vs 33.3%, OpEx 56.5m vs 47.9m, OM 16.1% vs 16.5%, OpInc +15% to 10.9m, EBITDA 16m vs 13.2m

  • OEM +7.6% to 148.3m, GM 27.3% vs 29.6%, Enterprise +22% to 32.1m, GM 54% vs 48.1%, IoT +173% to 23m, GM 41.1% vs 47.3%

  • New CEO in place as of Nov 1st(was acting CEO).  Strong design win activity. 

  • Hit their OpEx target, continuing to focus on further cost reduction as per my conversation with the company below. 

  • Saw modest amount of customers buying in advance of tariffs. OEM GMs down q/q due to volume/mix in automotive.

  • Customer feedback is that IoT can be complex and difficult to deploy and scale, a partner like Sierra can integrate everything and reduce time to market, risk. Also cellular and gateways and MVNO services (and smart sim) provide integrated solution.

  • 4Q Guidance: Revs 200-208m (+9-13% y/y, -1.7% to +2.3% q/q, est 208m), EPS .22-.30 vs .28, est .32, incl (.03) tariff impact. 

  • Some rev constraints due to shortage in Intel CPUs and some auto softness. Moving manufacturing from China to Vietnam, should be largely completed in Q4 so expect minimal tariff impact in Q1.

  • Large auto program is starting to ship but won’t start ramping until 1H19

  • Solid results near or above their guidance range. 4Q Guidance looks soft at the midpoint, stock trading down in after hours. More importantly the business is still trending in the right direction, other semi companies providing softer guidance than SW (CY and SWKS for example)

Mid Q update

  • Had call with Investor Relations, nothing really new but confirmed company is increasing focus on attach rates of services rather than just selling modules, not just communication to investors but also to customers, seeing some instances of success and likely more success as customers become aware of value.  Former CEO recognized he was a hardware guy and not the guy to take the company to the next level, stepping down had nothing to do with dispute with board or any impropriety. Still in early innings of auto ramps which should keep ramping into 2020-2021.  Company’s focus on cost is a broader effort than in past acquisitions and should result in better productivity and efficiency.   

2Q18 .27 vs .30, est .21 

  • August 2, 2018, P=C$21.12. U.S.$16.20, TTM EPS=.86, ex cash P/E=17X, FY19 P/E=11X

  • Revs +16% to 201.9m, product +9.4% to 202m, services +130% to 23m, GM 34.4% vs 34.5%, OpInc 10.4m vs 11.4m, EBITDA 15.6m vs 14.9m

  • OEM +4.5% to 150.9m, GM 30.4% vs 52.1%, Enterprise +31% to 28.4m, OM 50% vs 47.5%, IoT +210% to 22.6m, GM 41.1% vs 42.6%

  • Guidance: 3Q Revs 198-207m (+14-20%, est 199), EPS .22-.30 (vs .23, est .25)

  • Announced share repurchase program up to 10% of shares, see filling CEO position by 4Q, seeing qualified and enthusiastic candidates.

  • Solid results, EPS meaningfully better than estimates, Guidance not only better than expected but most likely return to EPS growth, stock responding favourably as the company is projected to return to EPS growth in 3Q, valuation continues to look very attractive, FY18 and FY19 estimates look low.

 

1Q18   .09 vs .24, est .07

  • Revs +15.9% to 186.9m, GM 33.4% vs 34.5%, OM 2.3% vs 6.1%, OpInc 3.8m vs 9.2m, OpEx 58.6m vs 46.4m

  • Product +7.8% to 162.9m, Services and Other 24m, OEM +2.1% to 135.2m, GM 28.9% vs 31.7%, Enterprise +34.5% to 29.2m, GM 48.2% vs 48.3%, IoT 22.5m incl 13.4m from Numerex, +28.8% organic, GM 40.9% vs 43.8%

  • OEM growth due to Automotive with declines in transportation and energy.

  • 2Q Guidance: Revs 195-203m (+12.4-17%, est 196m), EPS .17-.25 (est .20), supplier component quality issue could hit EPS up to .03, on track to achieve OpEx target of 56.5m by 4Q

  • Expecting to see some relief in 2Q from supply constraint costs but some constraints continue, strong design wins

4Q17   .28 vs .27, w/ nominal tax rate, est .25, FY17 EPS 1.04 vs 0.68

  • Revs +12.6% to 183.5m incl 3.1m from Numerex as of Dec 7th, GM 33.8% vs 34.3%, OM 5.1% vs 7.2%, OpInc -19% as GP +6.1m, OpEx +8.4m to 52.5m

  • OEM +3.4% to 139.8m, GM 30.8% vs 31.2%, Enterprise +52% to 31.8m, GM 47.9% vs 52.1%, IoT +73.5% to 11.9m (+27.6% organic ex Numerex), GM 44.5% vs 39.3%

  • Issued 3.58m shares for acquisition of Numerex, repaid $20.2m of Numerex’s debt

  • Secured 2nd largest design win in history (automotive), starts shipping late 2019 (existing customer, goes from single region to global deployment)

  • 1Q Guidance: Revs 181-189m (incl 13m from Numerex, est 188, tight NAND memory supply constraining revs 5-6m), EPS .04-.10 (est .20) impacted by unusual and non-recurring items (including expediting orders) Targeting OpEx run rate of 56.5m in 4Q18 down from 59m expected in 1Q18

  • Stock has continued to get hit hard, 1Q EPS guidance is weak due to short term costs but cost cutting, growth, and Numerex acquisition and growth should be encouraging. Clearly I was looking too far out and ignoring short-term investor appetite but this is why I do incremental buys rather than backing up the truck, I still see the same long-term value.

3Q17   .23 vs .13, est .21 down from .24

  • Revs +12.8% to 173.2m, GM 33.4% vs 32.2%, OM 5.4% vs 4.1%, OpInc +48%, adj EBITDA +35% to 13.1m

  • OEM +8.4% to 138.5m, GM 29.8% vs 29.2%, Enterprise +38.8% to 26.3m, GM 48.1% vs 49%, Cloud and Connectivity +23% to 8.4m, GM 47.3% vs 42.4%

  • Expects Numerex acquisition to close in December.

  • 4Q Guidance: Revs 172-180m (+5.5%-10.4%, est 176), EPS .21-.29, (vs .27, est .26), EPS guidance appears to reflect dilution from Numerex acquisition but does not include revenue.

2Q17   .30 vs .20, est .28 up from .21

  • Revs +11.1% to 173.5m, GM 34.5% vs 33.8%, OpEx 48.5m vs 44.4m, OM 6.5% vs 5.4%

  • OEM +9% to 144.5m, GM 32.1% vs 31.0%, Enterprise +30.7% to 21.7m, GM 47.5% vs 53.9%, Cloud and Connectivity +4.3% to 7.3m (+8.4% ex fx), GM 42.6% vs 40.7%

  • OEM design wins higher than average, across various segments.

  • Low cash flow quarter with meaningful increase in inventories to use balance sheet to hold more inventories to support growth and reduce supply chain costs

  • Announced Acquisition of Numerex in all stock deal valued at ~$107m, .18 SW shares per Numerex share. Mgmt says will strengthen Numerex’s business, advance their product offerings, and accelerate growth of recurring revenue (from 4% of revs to >10% of revs)

  • 3Q Guidance: Revs 167-175m (+8.7%-14%, est 171.1m), EPS .17-.25 (vs .13, est .24), seeing GM compression as previously discussed due to next gen auto program transitioning to next gen solution with lower GM

  • Solid results, guidance not bad but the low end might concern investors, the acquisition being done with equity might be contributing to the stock being down 8% in the after-market but it should be a good platform for growth with no debt.

1Q 17.24 vs .08 vs guidance of .13-.20, vs .22 2 yrs ago, est .16

  • Revs +13.3% to 161.8m (est 156), GM 34.5% vs 32.9%, OM 5.6% vs 2.6%

  • OEM +10% to 133m, GM 31.7% vs 28.4%, Enterprise +44.8% to 21.7m, GM 48.3% vs 65.1% (GP +7.5% due to acquisition integration), Cloud and Connectivity +2.1% to 7.1m, GM 43.8% vs 40.1%

  • Seeing good continued momentum, higher than usual number of wins but expected lifetime value in line with recent quarters.

  • Cash declined q/q from 3.22/share to 2.90/share but not a concern as they reduced payables and the rest went into WC to support ramping programs and a small amount for an acquisition, non-cash WC=1.16/share so balance sheet is still very solid.

  • Guidance: Revs 165-175m, EPS .24-.32 (vs .20, .26 2-years ago), expect GM compression in 2H as a high-volume auto program transitions to a next-generation solution which has a lower GM, to some degree already being felt as transition has been taking place but expect acceleration in 2H. Mgmt indicates while this will be dilutive to GM, Gross Profit will grow due to volumes.

4Q 16 .27 vs .08, vs guidance .13-.19, vs .29 2 yrs ago, est was .16

  • Revs +12.5% to 163m vs guidance 157-166, GM 34.3% vs 31.2%, OM 7.2% vs 2.3%

  • OEM +11.2% to 145.2m, GM 31.2% v 27.6%, Enterprise +27.1% to 21m, GM 52.1% v 53.6%, Cloud and Connectivity 6.8m +0.5% to 6.83m, GM 39.3% v 41.4%

  • OpEx 44.1m vs 41.9m

  • In 4Q15 announced its largest design win which turns out to be VW, about a year later announced another win with VW for late 2018 prodn, big elephants have lower GMs

  • Guidance: Revs 152-161m (+6.4-12.7%), EPS .13-20 vs .08, est .12