Sierra Wireless: Taking Another Look After Q4 Results

| About: Sierra Wireless, (SWIR)

Summary

SWIR reported 4Q15 earnings below previous guidance.

2016 guidance well below street consensus.

Shares reflect lack of trust in guidance.

Overview

My original thesis on Sierra Wireless (NASDAQ: SWIR) was based on conservative estimates of growth in revenues and EPS driven by the continued adaptation of IoT. SWIR reported 4Q15 results, and it seems my estimates weren't conservative enough.

SWIR reported 4Q15 results of $0.08 non-GAAP EPS which were below the company's guidance, given one quarter ago, of $0.09-$0.11 and my estimate of $0.10. Revenues of $144.85mm were below company guidance of $148-151mm and my estimate of $148mm.

SWIR split their business into three segments this quarter, splitting out Cloud and Connectivity Services from the Enterprise Solutions segment.

OEM Solutions reported $122mm of revenues in 4Q15, the lowest reported revenues in one quarter since 2Q14. Gross margins declined for the fourth straight quarter.

Enterprise Solutions reported $17mm of revenues in 4Q15, a decline of $1mm from 3Q15 and $3mm from 4Q14. Gross margins, however, increased from 3Q15 but were down compared to 4Q14.

Cloud and Connectivity Services reported $7mm of revenues in 4Q15, an increase of $0.6mm from 3Q15. Gross margins, however, declined from 3Q15.

Overall the results were disappointing to say the least. The company cited softer demand at select OEM customers which SWIR believes reflects increased caution in the face of an uncertain macro-economic environment. In addition, management said that they had program launches in 4Q which contributed to lower margins.

Guidance and Trajectory

Even more troublesome was the guidance for 2016 provided by management which calls for $0.60-0.90 in non-GAAP EPS and $630-670 million of revenues. A far cry from Street consensus ($0.98 EPS, $674mm Rev) and my previous estimates ($0.90 EPS, $672mm Rev). Furthermore, management provided 1Q16 guidance of $0.00 per share ("slightly negative to slightly positive") and revenues of $135-145m. What is interesting is that if you calculate the growth needed from the midpoint of the 1Q16 revenue guidance ($140mm) to the midpoint of FY16 revenue guidance ($650mm), SWIR would need to grow revenues 10% each sequential quarter after 1Q16. That is hard to believe given the recent quarter's results and 1Q16 guidance.

Source: Model

Management was questioned on the earnings call about this trajectory and their response did not provide any clarity….

"..my answer to that is we (predicate) and try to be very careful and more careful in setting guidance this quarter, given our previous two misses. And we certainly acknowledge that it requires a step up starting in Q2 and that's what we see in our business for the reasons previously stated. And I'll also say, the middle of that range - the middle of the $135 million to $145 million range - is lower than we've seen historically. So getting back to something considerably higher than that is territory we've seen before. It's not as though we've never seen it before. So given the drivers we've already highlighted in our business, given the fact that we have been there before, that's no guarantee that we will get there again, but we have been there before and we think we understand the very specific things that are causing today's softness. That gives us confidence in the range we have put up and I would say we tried to be very careful in the range we put up as well."

"..we believe we've set the guidance, so that we don't have another miss. We have a macro situation that rapidly moved sideways on us from here then we might have a different set of challenges. But this is the way we see it and we believe that we have risk adjusted it properly and risk adjusted it more aggressively than certainly the last two quarters."

Is management being ultra-conservative in 1Q16 estimates? If so, why not carry that throughout the year? Are they expecting a big beat in 1Q16 which will make full-year estimates more realistic?

Although management did mention they expect PC OEM and automotive to come back to normal levels and expect the launch of 40 plus new programs to contribute to the increase in revenues starting 2Q16, I'm still skeptical of the trajectory. Therefore, I have updated my estimates to reflect 1Q16 revenues of $135mm (low-end of guidance) and a sequential 2% growth of revenues until 4Q17. This results in $556mm 2016 revenues and $602mm 2017 revenues.

Source: Model

Buybacks

SWIR announced the intention to buy back up to 10% of its public float (9.7% of outstanding shares). Since SWIR is listed on the Toronto Stock Exchange, this is called a normal course issuer bid. I'm somewhat disappointed to hear that SWIR is buying back shares. To me this reflects the lack of investment opportunity to grow the business, whether organically or through M&A. At current prices, however, the repurchase would cost SWIR ~$34mm compared to its cash on hand of $93.9m as of 4Q15. In addition, at current prices, shares would be bought back at a slight discount to book value (current market cap of $353m vs $358mm 4Q15 BV). Purchases can commence on February 9, 2016, and are subject to certain limits.

Other News

Cisco's (NASDAQ:CSCO) acquisition of Jasper Technologies for $1.4 billion is a disappointment for those hoping for Cisco to acquire Sierra Wireless. Jasper's service platform is used by many companies including some of the top automakers. While Sierra Wireless provides an end-to end solution, Jasper is more focused on their cloud and services platform.

Valuation

I've updated my valuations to reflect lower revenues of $556m in 2016E and $602mm in 2017E. I've also lowered the EV/rev multiple to 0.50 from 1.0. Based on these estimates, SWIR's 12-month price target is $12.

Source: Model

I've also updated my EPS estimates to reflect the lower revenue figures and higher operating expenses in 2016 (management cited higher OpEx on the conference call for 2016). I conclude on EPS of $0.70 for 2017E. I also lowered the P/E ratio to 15 from 20 given the lower trajectory of growth. As a result of these assumptions, the 12-month price target is $11.

Source: Model

Equally weighting these valuations results in a 12-month price target of $11.50 which is essentially where the stock trades currently ($10.93 as of 2/5/16). These estimates do not reflect the potential repurchase of 9.7% of outstanding shares. As mentioned in my previous post, you can track my performance of my Seeking Alpha recommendations here. I have decided to keep my initial 5% allocation of this portfolio unchanged for the time being.

Other Valuation Metrics

EV/EBIDTA - With reported FY15 Adjusted EBIDTA of $42.9m, and an enterprise value of $259.5mm (as of 2/5/16), SWIR currently trades at an EV/EBIDTA of 6x, which in my opinion, properly reflects both the concerns of investors and the potential opportunity of the company.

Potential Upside Catalysts

Quicker normalization of PC OEM and automotive customers than expected.

Improved macro-environment

Potential Negative Catalysts

Prolonged weakness from PC OEM and automotive customers

Continued hesitation of customers due to macro-environment

Inability to expand margins from new program launches

Increased operating expenses

Disclosure: I am/we are long SWIR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.