Wall Street stomped Sierra Wireless Inc.-sending the company’s stock down an astounding 38 percent to $8.97 per share-after the company said it expects to post a massive drop in first-quarter revenues and a huge loss. Just 12 hours later, Sierra’s main rival, Novatel Wireless Inc., forecasted relatively stable first-quarter results, which the company said shows it is “winning market share in a seasonally softer period and best positioned to capitalize on the growth of 3G markets.”
The numbers highlight the turbulent nature of the wireless modem industry, which sits on the leading edge of the wireless market and can be subject to the fickle inclinations of early adopters and experimental carriers. Sierra’s extensive first-quarter decline is due to a series of miscalculations and obstacles.
First, Sierra placed much of its revenue hopes on sales of its Voq smart phone. So far no carrier has agreed to sell the phone-a situation that can stifle the prospects for a wireless device. Second, Sierra now faces competition for its most important customer. Verizon Wireless recently began selling CDMA EV-DO PC cards from Novatel, a move that ended Sierra’s monopoly on the carrier’s EV-DO PC card sales. Finally and perhaps most importantly, Sierra lost its most important embedded module customer, PalmOne Inc. Although Sierra previously had announced it would no longer supply the wireless modem in PalmOne’s Treo, the hit to the company’s financials was greater than Wall Street had expected.
“We do not expect material improvement in sales until the second half of this year, so the share may languish,” wrote Lehman Brothers in a note to investors. The firm makes a market in Sierra securities, and has conducted investment banking services for the company within the past year. “As May is likely to prove the low point, however, further downside seems unlikely.”
For Sierra’s first quarter, the company expects revenues of between $18 million and $20 million and a staggering net loss of between $9.2 million and $9.9 million. Wall Street had expected revenues of $54 million and a significant profit, according to Thomson First Call. For the fourth quarter, Sierra reported revenues of $58 million and net earnings of $7.3 million.
On the flip side, Novatel said it expects first-quarter revenues of between $32 million and $34 million-more than double its revenues from the same quarter a year ago. Although the numbers were down from analysts’ expectations of $36 million, Novatel’s stock was up slightly after the news to $13.35 per share. Novatel plans to report its fourth-quarter earnings Feb. 10.
In its conference call, Sierra executives laid out the company’s revamped strategy. Sierra had intended to sell a W-CDMA PC card this year, but company executives said they have abandoned that plan. Now, Sierra will skip straight to a HSDPA PC card, which it expects to release in the second half of this year. The company also said it is in discussions with “tier-one” laptop vendors to embed its wireless 3G modules into laptop computers. Such a move would be notable as laptop vendors today only offer embedded Wi-Fi modems. Finally, Sierra reiterated its support for the Voq smart phone, adding that it will release an HSDPA-capable Voq in the first half of next year.
“In light of the sensitivity in our Sierra Wireless financial model to new product hits and the lack of any company financial guidance beyond the first quarter of 2005, we expect Sierra Wireless shares to be volatile over the course of the next several months,” wrote Harris Nesbitt in a note to investors. The firm makes a market in Sierra securities.
Harris Nesbitt maintained its “neutral” rating on the company’s stock, but Merrill Lynch, Piper Jaffray and Caris & Company all downgraded their opinion on Sierra.
