Sierra Wireless Inc

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

Key highlights

• Divesting automotive business: The company is divesting its China-based automotive embedded module product line for USD 165 million in cash. The transaction is expected to close in Q4 2020. After shedding, the company would focus on device-to-cloud IoT solutions, driving high-value recurring revenue and investing further in 5G embedded modules.

• Strengthening 5G embedded modules: Presently, the company is working on developing Fifth Generation (5G) cellular embedded modules that are being launched in Europe in Q4 2020. Since the group provides 4G cellular gateways, complemented by cloud-based services and software for secure management, they will also be launching its first 5G gateway in Q4 2020.

• Initiating steps to minimize operating expenditure:The Company has started 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% compared to USD 136.69 million in Q3 2019. Revenues declined mainly due to lower hardware sales in Enterprise gateway products and IoT Solutions modules and lower mobile computing and networking sales under embedded broadband.

• 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, primarily due to reasons above stated.

Risks associated with investment

The current economic downturn impacted the Company's operating segments adversely through lower automotive revenue and weak demand for its hardware products. Any further restrictive measures 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 are also present. 

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

The Company is presently working on developing Fifth Generation (5G) cellular embedded modules that are being launched in Europe in Q4 2020, and it will be launching its first 5G gateway in Q4 2020. Also, due to rise in usage work from home and other social media activities, services like IoT are in higher demand. The company is well poised to take advantage of the upcoming opportunities. Furthermore, divesting of embedded automotive business is likely to reduce operating expenses, which is expected to improve the margins and boost its cash flows. The Company will strengthen its focus on device-to-cloud IoT solutions, driving high-value recurring revenue and will invest additional in 5G embedded modules and routers that would lead to improved business prospects. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 18.32 on January 4, 2021. We have considered Viavi Solutions Inc, Digi International Inc, Telit Communications PLC, etc. as the peer group for comparison.

Source: Refinitiv (Thomson Reuters)

BlackBerry Limited

BlackBerry Limited (TSX: BB), provides security software and services to enterprises and governments. The Company leverages artificial intelligence (AI) and machine learning to deliver solutions in cybersecurity, safety and data privacy and offers endpoint security management, encryption, and embedded systems. 

Key highlights

• Building new partnerships:AWS and BlackBerry join forces with new intelligent vehicle data platform, BlackBerry IVY. It’s a multi-year, global agreement to codevelop and co-market a software platform to read and normalize vehicle data to securely create actionable insights. We believe this partnership would derive good results in the upcoming time.

• Launching new products:The Company launches its first user behaviour AI technology for cybersecurity, named “BlackBerry Persona Desktop” which uses advanced AI and machine learning to deliver continuous authentication to validate user identity in real-time and protect against security breaches. 

• Redeemed convertible debentures: In Q3 2021 the company redeemed its existing USD 605 million of convertible debentures and issued USD 365 million of new convertible debentures, reducing the level of debt by USD 240 million, which could further minimize the group’s interest expense on an annualized basis. 

Financial overview of Q3 2021 (United States dollars, in millions, except per share data)

Source: Company

• In Q3 2021 the Company reported consolidated revenue of USD 218 million, which decreased by 18% compared to USD 267 million in the previous corresponding period.

• Software and Services segment reported revenue of USD 162 million, or 74.3% of revenue, in Q3 2021, compared to USD 185 million, or 69.2% of revenue, in Q3 2020, The decrease was primarily due to decline of USD 29 million in recurring royalties in BlackBerry QNX, due to the slowdown in the automotive market related to the COVID-19 pandemic.

• Licensing and Other segment generated a revenue of USD 56 million in Q3 2021, a decrease of USD 26 million compared to USD 82 million in Q3 2020, primarily due to the Company’s patent licensing agreement with Teletry and a decrease in direct intellectual property (“IP”) licensing arrangements.

• The Company posted a net loss of USD 130 million in the reported quarter against a loss of USD 32 million in Q3 2020. The loss maximized primarily due to Debentures fair value adjustment and decreased revenue.

Risks associated with investment

The investment in the company is subject to various risks including difficulties in forecasting the company’s financial results and performance for future periods, particularly over longer periods, given changes in technology and the company’s business strategy, evolving industry standards, intense competition and short product life cycles that characterize the industries in which the company operates.

Valuation Methodology (Illustrative): EV to Sales 

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

Stock recommendation

The Company experienced sequential Software & Services revenue growth and observed a partial recovery in global automotive production volumes in the second and third quarter of fiscal 2021. Due to the improving scenario, the Company expects total revenue for the year to be around USD 950 million. Also, on the back of new partnerships and new product launches, we expect the group to release healthy numbers in the upcoming time. Therefore, based on the above rationale and valuation, we have given a "Hold" rating at the closing price of CAD 8.44 as on January 4, 2021.

We have considered ProntoForms Corp, Absolute Software Corp, Citrix Systems Inc etc. as the comparison's peer group.

Source: Refinitiv (Thomson Reuters)

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