Don't Buy Sierra Wireless Until These 2 Things Happen

Sierra Wireless (SWIR) announced mixed fourth-quarter 2019 results two weeks ago relative to the company's own outlook. Shares of the wireless-connectivity equipment specialist have plunged more than 22% since then. 

Of course, around half of that drop came as the broader market plummeted on concerns over the economic fallout of the global coronavirus outbreak, with the S&P 500 losing nearly 12% last week alone.

But that doesn't necessarily make Sierra Wireless a buy today. Before we get there, let's gather some perspective with a closer look at the tech stock's latest headline numbers:

DATA SOURCE: SIERRA WIRELESS. GAAP = generally accepted accounting principles. 

IMAGE SOURCE: GETTY IMAGES.

Investors should keep in mind that the above GAAP earnings include the impact of unusual items like restructuring and acquisition costs. Adjusted for those items, Sierra Wireless' (non-GAAP) loss was a more modest $0.08 per share. 

All told, that brought full-year 2019 revenue to $713.5 million -- well above guidance provided in early November for a range of $708 million to $712 million. But it also translated to an adjusted net loss of $0.01 per share, below guidance for a range of breakeven to earnings of $0.03 per share. 

On contributions from recurring revenue

Within Sierra Wireless' top line, IoT (internet of things) solutions segment revenue declined 5% year over year to $90.0 million, as lower integrated IoT solutions module sales more than offset 16.3% growth (excluding the divestment of iTank in late 2018) in recurring and other services revenue. Embedded broadband solutions segment revenue also fell 21.1%, to $83.4 million, as growth from automotive products helped prop up declines in sales to mobile computing and networking customers.

Sierra Wireless CEO Kent Thexton reminded investors that the company unveiled its strategy more than a year ago to shift away from being a hardware-focused IoT company to "delivering full IoT solutions with recurring revenue attached to our market-leading IoT devices."

Indeed, Sierra wireless did manage to muster $99.1 million in recurring/other services revenue last year. But that was only up 5% year over year from 2018 -- though Saxton noted Sierra Wireless has also secured significant design wins with more than $90 million of "future recurring revenue from hundreds of new accounts."

Even then, it remains to be seen how quickly those design wins will translate to actual revenue. And I think investors should exercise caution until we see more tangible progress to that end demonstrating how recurring revenue can effectively offset declines from Sierra Wireless' sluggish legacy businesses.

On guidance -- and the coronavirus wild card

For the full-year 2020, Sierra Wireless also told investors it's targeting revenue of $690 million to $710 million -- assuming IoT Solutions revenue returns to growth of 7% to 10%, while Embedded Broadband revenue falls by 12% to 15%. Trending toward the bottom line, that should mean adjusted EBITDA in 2020 of between $10 million and $15 million. 

That wouldn't be terribly concerning as -- more than anything -- it marks a continuation of Sierra Wireless' ongoing transition toward IoT and adjacent recurring sales.

During the subsequent conference call, however, Sierra Wireless CFO David McLennan elaborated that there is "significant uncertainty around the impact of the coronavirus on the industry supply chain and potentially certain operational activities."

Worse yet, Sierra Wireless' initial 2020 outlook does not incorporate the potential impact of coronavirus on the company.

Given the massive ramp in concern for the rapid global spread of coronavirus that absolutely crushed the markets last week -- and only then after the virus caused the temporary closures of everything from restaurants to airlines and manufacturing plants in China -- it seems as though Sierra Wireless' outsized share-price punishment in recent days is justified.

As such, until investors receive more clarity on both how quickly recurring revenue can ramp and the impact of coronavirus on Sierra Wireless' business, I'm content remaining on the sidelines.