Sierra Wireless – Going Wild (NASDAQ:SWIR)

Shares of Sierra Wireless, Inc. (NASDAQ:SWIR) have seen solid performance as of recent, certainly in relation to the rest of the market. The share price momentum being driven by strong operational performance.

This is sufficient of a reason to update a thesis which goes back to the summer of 2020 when I concluded that Sierra was announcing an interesting sale, in a very uncertain period of time.

Back To The Summer Of 2020

In July 2020, Sierra Wireless announced the sale of its China-based automatic embedded module product line to Hong Kong-based Rolling Wireless in a deal valued at $165 million, or $146 million net of cash. This was equal to just below 1 times sales, reported at $166 million in 2019.

The deal would create a fully focused integrated IoT (Internet of Things) solution provider, although 4G LTE embedded modules and new 5G modules would be retained. If we look at the 2019 results, Sierra posted a 10% decline in full year sales to $713 million, with net losses coming in at $70 million. The company posted break-even results based on adjusted earnings, yet with a huge part of the difference stemming from stock-based compensation expenses, I was not happy to adjust down to break-even results as the company was still posting economic losses.

The 36-million share count translates into a value of just around $350 million at around $10 per share, even including a modest net cash position. This reveals that the sale of the embedded module product line was equivalent to nearly half the enterprise valuation, translating into very non-demanding valuations for the core business, albeit that the company was posting losses and 2020 was set to become a challenging year.

I believed that if the company might fetch a similar sales multiple for the remaining core business, the company could be worth $17-$20 per share. Shares rallied from $9 to $13 upon the deal announcement which killed some of that immediate appeal.

While the deal looked great due to selling challenging assets at a high multiple and obtaining a lot of cash in an uncertain environment, there still was great uncertainty, including a troubled history of boom and busts

Stabilization And Acceleration

Following the dealmaking efforts in 2020, shares have been trading in a $15-$20 range for pretty much all of 2021, levels at which shares still traded early in 2022. Since May, shares have rallied from $16 to a high of $25, vastly outperforming markets here.

Fast-forwarding to February of this year, we saw the company posted a 5% increase in sales to $473 million, with revenues quite a bit smaller from 2019 as a result of the divestment, of course. Promising is that fourth quarter revenues rose 25% to $150 million, for a $600 million run rate. The company still posted a huge GAAP operating loss of $80 million for the year, albeit that losses narrowed to $10 million in the final quarter. That still includes more than $4 million in amortization and impairment charges, as well as over $7 million in restructuring charges. Adjusted for that, realistic break-even levels were more in sight.

In the meantime, quite some has changed. The company has seen dilution to 37 million shares outstanding, as net cash balances have fallen to $67 million here. At $25 per share, the company is awarded a $925 million equity valuation, which excluding $67 million in net cash comes down to a $860 million valuation. This was based on a first quarter revenue outlook seen at a midpoint of $142.5 million, with no further guidance given for the rest of the year.

In April, Sierra announced the sale of the Omnilink offender monitoring business in a $38 million cash deal, a deal in which the company is set to forfeit $13 million in revenues. This revealed that a solid revenue multiple has been fetched at nearly 3 times.

The move higher in the shares has been driven by very strong first quarter results, as released in May, with revenues up 60% to $173 million, far ahead of the guidance issued a quarter before. While the company posted an operating loss of $10 million, that comes after a combined $18 million in restructuring, impairment, and amortization charges, revealing some realistic profits, or break-even results.

Losses make that net cash has been depleted below the $40 million mark, but this is ahead of the Omnilink sale, of course. The company sees momentum continuing in the second quarter, with revenues seen at a midpoint of $167.5 million, still trending at nearly $700 million run rate. This means that the company is still valued at over 1 times ales, as break-even results are really achieved here.

Concluding Remark

Right here, valuations have been reset in a major way. Valuations have increased on the back of the strong momentum in the past two quarters, albeit that I am not too impressed with operating leverage just yet.

With momentum arguably invited by tight inventory position and likely stronger pricing as well, the reality is that actual profits are not really seen, as the risk-reward has not really improved. I still have concerns about the historical performance and the longevity of the current operating momentum. I am not being particularly compelled to the current risk-reward, although I am impressed with the results achieved so far.