Sierra Wireless Inc

Sierra Wireless Inc (TSX: SW) is a leading wireless communication equipment designer and provider of Device-To-Cloud Internet-of-Things solutions. The company's product and services portfolio contain products such as high-speed cellular modules and services such as connectivity services, cloud platforms, etc. It operates through two business segments: Internet of Things solutions and Embedded broadband.

Key highlights 

• Divested automotive business: The company announced that it had completed the previously announced sale of its Shenzhen, China-based automotive embedded module product line to Rolling Wireless (H.K.) Limited for US$ 165 million in cash. The sale of the automotive product line includes approximately US$ 19 million of cash and is subject to normal working capital adjustments. Sierra Wireless has exited automotive applications but will continue to invest in high-speed cellular modules used in Enterprise and Mobile Broadband applications.

• Initiating steps to curtail operating expenditure:The company has initiated the measures to restrict the rising operational spending by approximately USD 25-30 million on an annualized basis. In the reported quarter these expenditures as a percentage to sales were 50.5% as against 45.7% in Q3 2019. This step would help the company in rightsizing the business and improving ongoing earnings and cash flows. 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company reported sales of USD 113.37 million, decreased by 17.1% as compared to USD 136.69 million in Q3 2019. 

• Revenue from IoT Solutions was USD 79.1 million, decreased by 15.4% compared to USD 93.4 million, due to lower hardware sales in Enterprise gateway products and IoT Solutions modules driven by the impact of COVID-19.

• Revenue from Embedded Broadband, excluding the Automotive Business, was USD 34.3 million, decreased by 20.8% compared to USD 43.3 million, reflecting lower mobile computing and networking sales due to previously communicated design losses of two higher-margin computing customers.

• In Q3 2020, the company reported a loss from operations of USD 17.78 million, as against a loss of USD 12.84 million in the previous corresponding period, primarily due to higher operating expenses of USD 57.2 million, or 50.5% of sales as against 45.7% of sales in Q3 2019.

• Net loss from continuing operations reported by the company in Q3 2020 stood at USD 14.48 million, as against USD 19.76 million in the previous corresponding period. 

Risk associated with investment 

The current economic downturn on account of COVID-19 had impacted the operating segments of the company adversely through lower automotive revenue and weak demand for its hardware products. Shutdown or other business interruptions could result in material and adverse effects on the company’s ability to conduct business. Other risks such as currency fluctuations, technology risks, regulatory risks may also affect the group’s performance. 

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation 

Recently announced divesting of embedded automotive business is likely to result in reduced operating expenses, which is expected to improve the margins. Further, the Company would strengthen its focus on device-to-cloud IoT solutions, driving high-value recurring revenue and will invest additional in 5G embedded modules and routers, which would lead to improved business prospects. Due to rise in usage work from home and other social media activities, services like IoT are higher in demand and the company is well poised to take advantage of the upcoming opportunities. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ recommendation at the closing price of CAD 19.25 on November 27, 2020. We have considered Digi International Inc, TESSCO Technologies Inc, NETGEAR Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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