Image source: Sierra Wireless, Inc.

Sierra Wireless (NASDAQ:SWIR) may have released solid second-quarter 2016 results Thursday after the market close, but thanks to a disappointing outlook, shares are down more than 18% as of this writing. Let's take a closer look at what happened.

Quarterly revenue fell 1.1% year over year, to $156.2 million, which translated to net income of $0.07 million, or $0.2 per share. On an adjusted basis, which adds perspective by excluding one-time items like stock-based compensation and acquisitions expenses, net income declined 25.6% year over year to $6.4 million, or $0.20 per diluted share.

That said, both Sierra Wireless' top and bottom lines technically exceed expectations; guidance provided last quarter called for quarterly revenue in the range of $150 million to $160 million, and adjusted earnings per share of $0.09 to $0.17.

Sierra Wireless CEO Jason Cohenour explained:

Revenue and non-GAAP earnings improved sequentially in the second quarter, driven by stronger OEM and Enterprise sales. We also strengthened our strategic position in the important Fleet Management and Asset Tracking segments with the acquisition of GenX Mobile.

Digging deeper

More specifically on the acquisition, on August 3, 2016, Sierra Wireless completed its $7.8 million ($6 million, net of cash acquired) purchase of GenX Mobile, a provider of in-vehicle cellular devices for fleet management, asset tracking, and transportation markets. GenX's products are complementary to Sierra Wireless' existing offerings under its Enterprise Solutions portfolio of mobile and industrial gateways, and the company believes the acquisition should improve its strategic position and expand its telematics and location capabilities. 

Breaking down Sierra Wireless' segment-specific performance, the core OEM solutions segment saw revenue fall 4% year over year, to $132.6 million, as the positive impact of new customer programs are contributing as expected. New design wins within OEM solutions include a deal providing AR Series modules to Chinese connected car specialist Pateo, as well as HL series modules for telematics units with fleet fuel management and driver safety company SmartDrive.

Next, enterprise solutions sales rose 10% over the same period, to $16.6 million, helped by the launch of its new AirLink MP70 LTE-A router, with new customer wins across the transit and public safety sectors. Meanwhile, revenue from Sierra Wireless' newer cloud and connectivity services business -- which was broken out from enterprise solutions late last year -- climbed 46.8% year over year to $4.8 million, with broad-based customer wins across automotive, industrial, security, and signage industries, and continued strength from cross-selling its device-to-cloud products to existing customers within both the OEM and enterprise solutions segments.

Trending toward the bottom line, gross margin for the quarter expanded to 33.8%, compared to 32.3% in last year's second quarter, including adjusted gross margin of 31% at OEM Solutions, 53.9% at enterprise solutions, and 40.7% at cloud and connectivity services. Note consolidated gross margin was also helped by a $1.9 million reimbursement of legal costs (included under cost of goods sold) related to favorable arbitration on a contract dispute with an intellectual property licensor.

Looking ahead

That's all well and good so far. But things got a little murky when it came to guidance.

First, Sierra Wireless insists it remains "well positioned to drive strong long term growth," especially as the company anticipates continued traction in the contributions from new OEM programs in the coming quarters. However, Sierra Wireless is taking a cautious approach to guidance as it sees "signs of softer short term demand and tighter inventory management with some established OEM customers and programs."

As such, Sierra Wireless expects third-quarter revenue in the range of $145 million to $155 million and adjusted earnings per share of $0.06 to $0.13. By contrast -- and while we don't usually pay much attention to Wall Street's near-term demands -- analysts' consensus estimates were modeling third-quarter revenue of $167.2 million and adjusted earnings of $0.22 per share. 

Finally, for full-year 2016, Sierra Wireless expects revenue and adjusted earnings per share to be at the low ends of its previous guidance ranges, which called for revenue of $630 million to $670 million and adjusted earnings per share of $0.60 to $0.90. Note this new guidance excludes any contributions from GenX, which recorded revenue of roughly $6.7 million and achieved roughly breakeven adjusted earnings from operations in the first half of the year.

In the end, it's hard to blame investors for taking a step back given this cautious outlook, even if there's still a chance Sierra Wireless could be under-promising with the intention of over-delivering. So, while nothing has really changed for patient, long-term shareholders, I suspect shares of Sierra Wireless will remain depressed until we see signs that those short-term demand headwinds are fading. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.