MIFI Novatel Wireless, Inc. (MM)

Novatel Wireless Inc. (NVTL)declared its third quarter 2011 financial results after the closing bell yesterday. Despite surpassing the Zacks Consensus Estimate, Novatel suffered from net losses and management failed to provide any timeframe when Novatel will again earn profits.

On a GAAP basis, net income in the third quarter of 2011 was $4.5 million or 14 cents per share compared with a net loss of $7.1 million or 22 cents per share in the prior-year quarter. Quarterly adjusted (excluding special items) EPS of a loss of 5 cents was much better than the Zacks Consensus Estimate of a loss of 9 cents per share.

Total revenue in the reported quarter stood at $113.3 million, reflecting a surge of 50% year over year, and in line with the Zacks Consensus Estimate. The significant upside in revenue was primarily attributable to huge market penetration of Novatel’s newly launched 4G-enabled products, especially 4G MiFi intelligent hotspots and 4G Expedite embedded solutions. Moreover, the recent launch of Spider MT 3000, which targets the transportation segment and N4A CMS 3.0, which supports delivery platforms further contributed to revenue growth.

GAAP gross margin was 23.6% compared with 17.5% in the year-ago quarter. Operating expenses in the reported quarter were $32.7 million compared with $19.6 million in the prior-year quarter. However, quarterly operating loss decreased marginally to $6 million from an operating loss of $6.4 million in the prior-year quarter.

During the third quarter of 2011, Novatel generated negative cash flow of $9.2 million from operations compared with a cash consumption of $10 million in the prior-year quarter. Free cash flow at the end of the reported quarter was negative $10.3 million compared with $8.1 million in the previous quarter. At the end of the third quarter of 2011, Novatel had approximately $55.3 million in cash & marketable securities on its balance sheet compared with $77.2 million at the end of fiscal 2010. The balance sheet of Novatel remains debt free.

Future Financial outlook

Management provided revenue guidance for the fourth quarter of 2011 in the range of $105 million–$120 million. Non-GAAP gross margin is expected to be 23%. Non-GAAP loss per share is anticipated in the band of 10 cents to break-even.

Revenue by Product Category

Revenue from Mobile Broadband Devices was $93.3 million, up 24.4% year over year. Embedded Solutions revenue was $13.8 million, up 70.4% year over year. Solutions & Services revenue was $6.2 million, down 19.5% year over year.

Mobile Computing Products Segment

Quarterly revenue was $102.7 million, up 35.8% year over year. Operating income was $1.3 million compared with an operating loss of $6.4 million in the prior-year quarter.

M2M Products & Solutions Segment

Quarterly revenue was $10.6 million and operating loss was $7.4 million.

Recommendation

From May 2011, Novatel started selling 4G LTE-capable Expedite embedded solutions with Verizon Wireless (VZ). Moreover, we believe that the continuous product launch coupled with healthy balance sheet will act as positive catalysts for the stock going forward.

However, stiff competition from Low-cost Asian manufacturers such as ZTE and Huawei Technologies coupled with weak customer base remain concerns for Novatel going forward.

We thus maintain our long-term Neutral recommendation on Novatel. Currently, Novatel has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

 
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