Before this month’s dip, BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) was trading over $15 for the first time since 2013, despite a negative EPS. Sierra Wireless, Inc. (TSX:SW)(NASDAQ:SWIR) is hovering around $40 for the first time in over two years and is trading at a multiple of 66 times earnings (Alphabet, by comparison, trades at 31 times). But are the increases in price justifiable?
In the case of BlackBerry, the earnings release last week was the sixth consecutive quarter that showed a decline in revenues. Compared to the prior year’s quarter, the decline was over 42%. The company is selling fewer handheld devices (a decline of 75% for that segment), and fewer people are using the company’s software, resulting in fewer service access fees (a 64% drop).
Although the company showed a profit of $671 million, that would have been a loss of $144 million if not for the Qualcomm arbitration award that resulted in a cost reduction of $815 million. Prior to this quarter, BlackBerry posted a net loss for six consecutive periods. The company is not showing any signs of growth; in fact, the opposite is showing in its financials.
The big question for BlackBerry is, where the growth is going to come from? Service access fees and handheld revenues accounted for over 60% of its revenues a year ago. Those segments are in serious decline, and if BlackBerry doesn’t find another way to reinvent itself, the stock will plummet.
Sierra Wireless has not suffered drastic sales decreases like BlackBerry has, but that doesn’t mean it is showing growth either. Sierra Wireless’s latest quarter has a year-over-year increase of 13%, but compared to the last quarter, it is almost flat. In 2014, the company had sales growth of 24%, followed by 10% in 2015, and, most recently, growth of just 1% in 2016.
Those numbers suggest growth is slowing and maybe even going flat. If Sierra Wireless’s profitability were improving, it would at least show signs of improvement in efficiency, but that hasn’t been the case either. Only once in the past five quarters has the company posted a net income figure that was over one million.
A concern is Sierra Wireless’s low gross margin percentages. The company is averaging in the low to mid 30s (by comparison, BlackBerry is around 40-50%), and, as a result, that doesn’t leave much to cover overhead expenses.
Not surprisingly, in Q4, when Sierra Wireless posted a profit of $15 million, its gross margin percentage reached over 42%. However, that margin improvement was not due to a sales mix issue, but rather to a change in estimate of its accrued royalty obligations of $13 million. Without this change, the gross margin would have been around 34%.
In this case, it looks like a blatant attempt to manage earnings. The change occurred in October 1, right when Q3 was wrapping up—a quarter so poor that it wiped out YTD profits. The timing and circumstances around it raise some concerns about the management and what pressures there may be to achieve desired results.
