Sierra Wireless (NASDAQ:SWIR) investors have been an enthusiastic lot this year thanks to the company's move into new markets such as 5G wireless networks and its strategy of shifting to a higher-margin business model in the Internet of Things (IoT).
Sierra stock has managed to outperform the broader market on account of recent strategic developments that could supercharge the Internet of Things business. Additionally, management believes that its focus on the 5G wireless market could unlock new opportunities next year. But a closer look at Sierra Wireless's results for the third quarter of 2020 clearly indicates that there's still some way to go before it can benefit from either of those catalysts.
Sierra Wireless disappoints in the third quarter
Sierra Wireless's third-quarter earnings report doesn't paint a pretty picture. After excluding revenue from the recently sold automotive embedded modules business, Sierra's revenue dropped to $113.4 million during the quarter as compared to $136.7 million during the prior-year period -- a decline of 17%. However, there was a 1.5% increase in the company's revenue on a sequential basis if we exclude the automotive business.
The company blamed its weak quarterly performance on a slowdown in enterprise hardware sales and IoT modules on account of COVID-19, a drop in the average selling price of its devices because of higher volumes, and stronger competition in the hardware-focused segments. These factors sent Sierra's IoT solutions revenue (that accounts for nearly 70% of the total revenue) down 15% year over year to $79.1 million.
The embedded broadband business also saw a 21% dip in revenue to $34.3 million. Sierra lost a couple of high-margin customers in this segment last year, and the company had already warned investors of the same. Sierra management also decided against issuing any guidance, citing the uncertainty created by the pandemic on its operations, though it did mention that it expects "continued improvements" going forward.
In all, Sierra Wireless bulls didn't have much reason to cheer last quarter, but there were some silver linings that are worth taking a look at.
Watch these silver linings
A closer look at Sierra Wireless' earnings report reveals that the company is making progress in certain areas. For instance, its recurring revenue during the quarter increased 22% year over year to $29.8 million, thanks to its focus on the IoT solutions business and an increase in demand for connected devices. The company now gets more than a quarter of its total revenue from the recurring and other services segment.
More importantly, Sierra achieved new wins in the service business worth $34.4 million during the quarter, up 62% over the prior-year quarter. Sierra says that these new contracts would boost its long-term annual recurring revenue. What's more, the company has secured $95 million worth of service contracts in the first nine months of 2020 that would contribute toward the growth of its long-term annual recurring revenue, an increase of 62% as compared to the year-ago period.
Sierra also pointed out on the latest earnings conference call that its hardware business has gained some momentum. Hardware design wins have jumped 20% in the first nine months of the year. All these design wins point toward a better top-line performance from Sierra Wireless in the future. Analyst estimates compiled by Yahoo! Finance also suggest the same, forecasting a single-digit drop in the company's revenue in 2021 as compared to the steep decline anticipated this year.
This indicates that Sierra Wireless's turnaround is still some time away, even though the company is showing some signs of life despite the challenges it is facing in the wake of the pandemic. As such, it would be a good idea to watch this semiconductor play from the sidelines until -- and unless -- it shows concrete signs of a turnaround.