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Can Sierra Wireless Inc. Get Back on Track?

By Steve Symington – Feb 3, 2016 at 2:35PM

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With shares down more than 60% over the past year, investors hope the Internet of Things specialist can turn the mood around with a solid fourth-quarter report.

If you're on the edge of your seat going into Sierra Wireless's (SWIR -0.52%) fourth-quarter report later this week, I certainly can't blame you. Shares of the Internet of Things pure play have plunged after each of its last three quarterly reports, including a whopping 45% decline over the past three months following its painful third-quarter results in November.

That's not to say Sierra Wireless investors should be running for the hills now. Despite what the market's negativity seems to indicate, Sierra Wireless management offered investors an encouraging light at the end of the tunnel three months ago.

Perspective is in order
Before we get there, recall that Q3 marked the first time in four quarters that both revenue and earnings fell below Sierra Wireless' own guidance; each of its previous declines came after relatively solid quarterly performances were followed with an underwhelming forward outlook.

More specifically, Sierra Wireless CEO Jason Cohenour called its third-quarter results "solid," and punctuated by an acceleration of growth from its smaller enterprise solutions segment, which saw revenue climb 26.3% year over year to $23.9 million. But he also admitted overall results were "slightly below expectations, as demand for 4G-enabled enterprise notebooks encountered temporary headwinds as the industry transitions to a new processor platform."

That platform is none other than Intel's Skylake micro-architecture, which was formally launched in August 2015. But the OEM transition to that platform is simply taking more time than initially expected, and Sierra Wireless is suffering as a result. That said, Cohenour insisted this particular headwind is temporary, and that Sierra Wireless expects "to see a return to normalized demand levels in the coming months."

It only takes one
But that's not the only thing holding back Sierra Wireless right now. As it stands, Sierra Wireless' fourth-quarter guidance calls for revenue in the range of $148 million to $151 million, or roughly flat at the midpoint from revenue in last year's fourth quarter, and a slight sequential decline from revenue of $154.6 million in Q3. In this case, Cohenour blamed the latest weak outlook on "the short-term effect of order timing from a larger automotive customer [...] who is adjusting their ordering cycle so that their orders more accurately reflect demand."

In particular -- and this helps explain some of Sierra Wireless' relative top-line outperformance in past quarters -- this automotive customer took more inventory than it required in reaction to RF component supply constraints earlier last year. And for better or worse (in this case, worse) in these early stages of Sierra Wireless' long-term growth story, we're still at the point where the  behavior of a single large customer can mean the difference between Sierra Wireless missing, meeting, or exceeding Wall Street's quarterly demands.

However, that this customer is simply shifting its order cycle isn't indicative of broader problems with Sierra Wireless' business, and its pending return to ordering patterns that are aligned with actual demand should be reflected in first-quarter guidance.

Assuming the pieces fall into place there, the one big question that remains will be when, exactly, will the processor platform transition be complete? Because when it is, that should go a long way toward reaccelerating growth in the company's core OEM solutions segment.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Sierra Wireless. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Sierra Wireless, Inc. Stock Quote
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