Not surprisingly, Internet of Things (IoT) semiconductor and service provider Sierra Wireless (SWIR) had a rough start to 2020. Supply-chain disruptions due to the economic lockdown to fight COVID-19, combined with declines in certain legacy business lines, conspired against the company and led to another fall in revenue.
Sierra withdrew its guidance for 2020 as its visibility on how coronavirus will affect business in the near future is cloudy. Some recent changes in management could be a signal that better times are ahead for this small chipmaker.
Breaking down the headline numbers
|
Metric |
Q1 2020 |
Q1 2019 |
Change |
|---|---|---|---|
|
Revenue |
$157.6 million |
$173.8 million |
(9.3%) |
|
Adjusted gross profit margin |
27.7% |
31.5% |
(3.8 pp) |
|
Adjusted net income (loss) |
($14.7 million) |
($0.9 million) |
N/A |
|
Adjusted EBITDA (loss) |
($9.2 million) |
$4.5 million |
N/A |
PP = percentage point. EBITDA = earnings before interest, tax, depreciation, and amortization. Data source: Sierra Wireless.
Within the 9% revenue decline, Sierra Wireless's IoT segment declined 16% year over year to $78.8 million. Breaking IoT down further, the high margin recurring-services division Sierra is most optimistic about over the next few years grew 17% to $26.8 million, including a $4.0 million revenue contribution from the takeover of M2M Solutions in Australia.
However, more than offsetting IoT services and software management were big declines in hardware sales. Sierra cited oversupply and continued pressure from lower-priced competitors. As was borne out last year, IoT connectivity is growing by millions of devices every year, but the hardware itself has become commoditized. Not great for Sierra's sales or profit margins.
The other half of the business -- embedded broadband -- fell 1% to $78.8 million during the first quarter. Higher sales to automotive manufacturers were nearly equally offset by lower sales to mobile computing customers like Dell and Lenovo.
Image source: Getty Images.
A board of directors shake-up
Progress made on IoT service is encouraging, but it's not going to cut it long term if legacy business continues to dilute the results. This was always a long-term turnaround story with Sierra saying it expected $200 million in service revenue by the end of 2022 and $400 million by 2024. Impressive growth, but hardware is the Achilles' heel for Sierra -- at least at the moment.
In April 2020, though, the company agreed with large shareholder Lion Point Capital to add some new members to its board of directors. Current CEO of Lattice Semiconductor Jim Anderson -- who has overseen a huge turnaround in recent years supplying the global 5G mobile network rollout -- is a member, as is former executive at BlackBerry Karima Bawa. Two additional seats could be added to the board subsequent to shareholder approval.
It won't be a quick fix, but getting some outside perspective could be just what Sierra needs to right the ship. There is certainly value to be unlocked in the business, especially if the higher-profit IoT service segment continues to grow. A struggling Sierra might also find itself a takeover target from a larger peer, although that is raw speculation on my part based on how deals in the industry have transpired in the past. But 2020 is shaping up to be another rough year. With revenue uncertain and profit margins still contracting, it's hard to get too excited about this semiconductor stock for the time being.
