The beatings on Sierra Wireless Inc. continue. Just a week after the company released dismal first-quarter expectations, a law firm filed suit against the company, alleging the wireless modem maker misled investors and essentially mismanaged its business.
Sierra Wireless said it had not yet seen the complaints, but added that “based on available information does not believe there is any merit in the allegations and will vigorously defend the lawsuits.”
The law firm of Schatz & Nobel P.C. filed a lawsuit seeking class-action status in the U.S. District Court for the Southern District of New York on behalf of Sierra’s stockholders. The suit contains several serious allegations.
First, the suit claims Sierra now faces increasing competition in its PC card business, a situation exacerbated by its “failure to enter into the W-CDMA market.” In its conference call with investors last week, Sierra announced it was abandoning plans to build a W-CDMA PC card and would instead focus on High-Speed Downlink Packet Access cards. Indeed, the company is moving full steam a head on the HSDPA front. It announced Thursday a successful test of its cards using Nortel Networks Ltd.’s HSDPA gear; earlier this week, it said it will also use Nokia equipment to test its HSDPA cards. Sierra plans to sell HSDPA cards in the second half of this year. The suit said Sierra has mismanaged its current PC card inventory levels.
The suit also alleges that Sierra’s entry into the smart-phone market with its Microsoft Corp.-based Voq phone “was flawed, and its business model was not working.” Sierra announced the Voq in 2003 but has yet to sell the device through any wireless carrier-generally a prerequisite to a successful phone launch.
Finally, and perhaps most damaging, the suit claims Sierra’s Voq smart phone “did little to add revenue and further seriously harmed Sierra’s relationship with a prime customer PalmOne as its Voq Smartphone would compete with PalmOne’s Treo-the product for which Sierra was a supplier.” The suit claims Sierra did not disclose the extent of its reliance on PalmOne’s business.
Sierra’s stock was up almost 4 percent after the filing to about $9.80 per share.
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.
Although investors have largely pummeled Sierra, Lehman Brothers offered a somewhat brighter outlook for the company’s long-term future.
“While visibility remains limited, we believe the overall traction for the mobile data market remains healthy,” the firm wrote in a note to investors. Lehman Brothers makes a market in Sierra securities and has provided investment-banking services for the company during the past year. “From a bottom-line perspective, if the company is able to execute and work through its current inventory concerns, improved top-line growth is likely to translate into better bottom-line outlook.”
