Novatel Wireless Inc.

Transcription

1 September 09, 2014 Novatel Wireless Inc. NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 05/23/2012 Current Price (09/08/14) $2.30 Target Price $2.50 SUMMARY (NVTL-NASDAQ) Novatel Wireless reported dismal financial results for the second quarter of 2014 as both the top and bottom line witnessed huge fall as compared with the last year quarter. Meanwhile, competition from low-cost Asian manufacturers coupled with a limited customer base will continue to act as headwinds. Management expects the company s 4G MiFi intelligent hotspots and Expedite embedded solutions to gain significant market traction going ahead. A debt-free balance sheet, continuous contract wins along with growing demand for telematics services are likely to act as tailwinds for the company. We believe Novatel Wireless is currently fairly valued and therefore, reiterate our Neutral recommendation on the stock. SUMMARY DATA 52-Week High $ Week Low $1.51 One-Year Return (%) Beta 2.44 Average Daily Volume (sh) 236,770 Shares Outstanding (mil) 37 Market Capitalization ($mil) $85 Short Interest Ratio (days) 2.51 Institutional Ownership (%) 24 Insider Ownership (%) 10 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) -1.8 Earnings Per Share (%) Dividend (%) using TTM EPS using 2014 Estimate using 2015 Estimate Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Above Avg., Type of Stock Small-Growth Industry Wireless Equipm Zacks Industry Rank * 206 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 102 A 71 A 71 A 344 A A 91 A 93 A 65 A 335 A A 37 A 71 E 82 E 238 E E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) $0.20 A -$0.13 A -$0.32 A -$0.44 A -$1.09 A $0.25 A -$0.22 A -$0.07 A -$0.18 A -$0.72 A $0.22 A -$0.35 A -$0.18 E -$0.10 E -$0.85 E $0.10 E -$0.09 E -$0.07 E -$0.01 E -$0.27 E Projected EPS Growth - Next 5 Years % 2014 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Novatel Wireless Inc. (NVTL) is a San Diego, CL-based provider of wireless broadband access solutions for the global mobile communications market. The company operates in the wireless data modem technology industry. The products include 3G wireless PC-card and ExpressCard modems, embedded modems, USB modems, Fixed-Mobile Convergence solutions, and communications software. These products are mainly used by wireless service providers, infrastructure solution providers, original equipment manufacturers, and distributors. Novatel also offers software engineering, integration and design services to customers to facilitate the use of its products. Segment wise, Mobile Computing Products accounted for 89% of the total revenue in fiscal The remaining 11% was generated from M2M Products and Solutions. Within the Mobile Computing segment, MiFi accounted for 84.8% of the total revenue. Embedded Modules accounted for 10% and the remaining 5.2% was generated from the PC OEM business. Geographically, North America generated 95.2% of the total revenue and international markets accounted for the rest 4.8%. Major customers include Dell, AT&T, Comcast Corp., Telefonica S.A., Verizon Wireless and Sprint. REASONS TO BUY Rising demand for mobile broadband is likely to propel growth at Novatel going forward. The company currently serves three large wireless operators in the U.S., namely, Verizon Wireless, AT&T and Sprint. Verizon has launched MiFi 4620 LE with an extended battery pack. Meanwhile, AT&T is using MiFi 2 products. Novatel has also launched MiFi 500 LTE in collaboration with Sprint. Novatel also launched an innovative product MiFi tower, which is incorporated with the MiFi technology platform to deliver home connectivity, digital phone service and Internet surfing. Recently, Novatel announced its plans to integrate its Mobile Computing (MiFi) and M2M (machineto-machine) product lines. Such initiatives by the company will certainly boost margins. Moreover, cost saving initiatives like downsizing workforce and cutting operating expenses by 31% and 34%, respectively, are expected to boost margins further. The company expects to generate $60 million in revenues from the M2M segment in fiscal 2014, with an annual growth rate of 30%. The optimism is based on expectations of significant orders from new customers. Also, the company s balance sheet remains debt free which is another positive. Novatel completed the acquisition of Enfora, a machine-to-machine (M2M) intelligent asset management solutions provider. Enfora has a long list of clientele including several enterprises, applications service providers, OEMs and distributors. This acquisition will strengthen Novatel s position in the fast growing M2M market. Various industry sources have estimated that the mobile M2M market may reach $20 billion by The company teamed up with HIMEX, a leading provider of Usage Based Insurance (UBI) and smart fleet management platforms, to deliver advanced solutions to the UBI market. HIMEX is aggressively incorporating the company s popular MT 3060 telematics devices into the HIMEX 3D World Platform in order to offer virtual renderings of telematics information. Moreover, MODIS a leading service provider of insurance telematics will use the company s MT 3060 devices. Thus, Novatel believes that such strong demand for insurance telematics devices will help the company generate better revenues going ahead. Moreover, launch of new M2M products in the upcoming quarter will further boost revenues at the M2M segment. In an attempt to counter competition as well as to gain market traction, Novatel is slowly shifting toward production of low-cost chipsets which may initially impact margins. However, by the middle of 2015, the margins are likely to expand gradually with the increase in sales. Within the M2M space, Novatel is concentrating on Commercial Telematics, Asset Tracking, Aftermarket Consumer Telematics and Fixed Telemetry. The company s direct-to-enterprise sales policy and several product introductions over the last few months are responsible for the success of its commercial Equity Research NVTL Page 2

3 telematics and Asset Tracking Verticals. Novatel started delivering MT 4100 devices to FleetMatics from the second quarter of FLeetMatics provides vehicle management solutions to nearly 22,000 customers with over 445,000 subscribed fleets worldwide. Moreover, the company intends to deliver MT 4100 to another fleet management firm, AirIQ. Novatel also entered into an agreement with Vehicle Tracking Systems (VTS), a popular fleet management system operator, to supply MT 4100 and MT 3050 devices to support the VTS Silent Passenger application. The deal will also facilitate VTS migration from GPRS to CDMA technology. Novatel is also undergoing product trials with several national and international customers and is involved in different stages of sales negotiations with insurance service companies for a large number of opportunities in Commercial Telematics. The company has won a contract with Teleges, one of the leading commercial vehicle telematics service providers. Novatel is deploying its popular SA2100 telematics device with Teleges fleet management location provider. The company also struck a deal with DigiCore Holdings Ltd., a leading provider of advanced machine-to-machine (M2M) communication and telematics solutions, to supply various versions of Novatel Wireless advanced MT 3060 OBDII technology. Hence, striking deals with two top telematics service providers will certainly drive Novatel s Commercial telematics business. The company also signed a contract with NexTraq, a leading provider of fleet management and vehicle tracking solution, to offer MT 3000 that offers GPS and geo-sensing support. Moreover, entering into a long-term deal with RAC Monitoring service to offer MT3060 telematics devices for vehicle tracking and crash detection will further boost the company s M2M business. Outside the U.S., MT 4100 is gaining popularity and the company has teamed up with Simple Solutions in Europe while in China, the government will use it for tracking government fleets. Novatel s future prospects look promising as it plans to acquire new customers and launch MiFi products for major telecom operators. Also, the company has added six new clients in the reported quarter. Moreover, higher proliferation of 4G-based devices and the launch of Windows-8 based devices will further create growth opportunities for the company in the near future. Recently, the company launched MiFi Home which connects digital telephone service and data access through a portable device. It can support up to 10 Wi-Fi based devices along with three Ethernet ports for connecting printers and network storage devices. MiFi Home is also quite useful for small businesses as it supports Voice over LTE (VoLTE). Moreover, it features Wi-Fi security as it is well protected with NAT firewall and also has internal and external antenna for better voice and data support. Apart from this, the company has commercially launched its CDMA products and is making strong progress with the rollout of its HSPA-based products. REASONS TO SELL We anticipate increasing competition for Novatel s MiFi product line. Several latest versions of smartphones have inbuilt WiFi capability. Low-cost Asian manufacturers, including ZTE and Huawei Technologies, have already launched their own version of intelligent mobile hot spots creating competitive pressure on Novatel. In the second quarter of 2014, the Mobile Computing Products segment generated revenues of $27.5 million, down a whopping 66% from the year-ago quarter while the M2M Products and Solutions segment also suffered 5% drop in revenues. Shortage in component supply coupled with delayed orders has resulted in the substantial decline in revenues. Quarterly gross margin stood at 10.7% compared with 20.9% in the year-ago quarter while quarterly operating loss was $17.4 million as against $7.4 million in the prior-year quarter. Moreover, the company has not provided outlook for the upcoming quarters as it lacks visibility. Equity Research NVTL Page 3

4 Intensifying competition for embedded modules is a major concern for Novatel. Apart from its traditional rival, Sierra Wireless, the company is facing significant challenges from newly-launched products by large manufacturers, including Qualcomm and L.M. Ericsson. Qualcomm has Gobi chipset that combines broadband modem technology for high-speed 3G networks with GPS functionality. Such intense competition will reduce the average selling price of the product. Novatel s business depends on a limited number of customers, who represent a significant portion of the company s total revenue. In the second quarter of 2014, the company s largest customer accounted for more than 50% of its total revenue. Loss of this customer will adversely affect the company s business model. Moreover, Novatel s business is not geographically diversified as North America alone accounts for nearly 97% of its total revenue. RECENT NEWS Second Quarter of Fiscal 2014 Financial Results Aug 6, 2014 Novatel Posts Dismal Q2 Result On a GAAP basis, net loss in the second quarter of 2014 stood at $17.4 million or 51 cents per share compared with a net loss of $7.9 million or 23 cents in the year-ago quarter. Quarterly adjusted loss per share was 35 cents compared with a loss of 22 cents in the prior-year quarter. Total revenue came in at $37.3 million, reflecting a massive drop of 59.1% from the year-ago quarter. Segment wise, Mobile Computing Products generated revenues of $27.5 million, down a whopping 66% from the year-ago quarter. M2M Products and Solutions revenues totaled $9.8 million, down 5.1% year over year. Quarterly gross margin was 10.7% compared with 20.9% in the year-ago quarter. Operating expenses in the reported quarter were $21.4 million against $26.8 million in the year-earlier quarter. Quarterly operating loss was $17.4 million as against $7.4 million in the prior-year quarter. Meanwhile, operating loss at the Mobile Computing Products segment was $12.3 million compared with $3.4 million in the year-ago quarter. Operating loss at the M2M Products and Solutions segment was $5.2 million against $4.4 million in the prior-year quarter. During the second quarter, Novatel consumed $4.4 million of cash for operations compared with a cash generation of $4.6 million in the year-ago quarter. Quarterly free cash flow was a negative $5.1 million against $3.8 million in the prior-year quarter. At the end of the quarter under review, Novatel had approximately $22.4 million in cash and marketable securities on its balance sheet compared with $19.5 million at the end of The balance sheet of Novatel remains debt free. VALUATION Novatel is currently incurring losses and therefore, it is not possible to value the stock on a multiple basis. With respect to the last quarter P/B multiple, the stock was trading at 3.7 x, a premium to the industry average but at a discount to the S&P 500. Novatel is currently facing double-edge problems. While several low-cost Asian wireless gear manufacturers have made the industry highly competitive, the availability of alternative products has also placed MiFi in a tight spot. However, we believe that a strong order book and increased demand for its new products bode well for the company. We, thus, maintain our Neutral rating with a target price of $2.50, based on 4.1x P/B. Equity Research NVTL Page 4

5 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low NOVATEL WIRELES (NVTL) Industry Average S&P SONUS NETWORKS (SONS) COMTECH TELECOM (CMTL) ZHONE TECH INC (ZHNE) CHINA TECHFAITH (CNTF) TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA NOVATEL WIRELES (NVTL) Industry Average S&P Equity Research NVTL Page 5

6 Earnings Surprise and Estimate Revision History Equity Research NVTL Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of NVTL. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1116 companies covered: Outperform %, Neutral %, Underperform 6.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research NVTL Page 7