Novatel Wireless, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; filed November 6, 2015. The filing identifies the registrant as Novatel Wireless, Inc. (not Inseego Corp.). Financial statements are unaudited and consolidated.
Business context
Novatel provided mobile hotspots, modems, embedded modules, M2M devices, software and related services. In March 2015 it acquired Feeney Wireless (FW), expanding its M2M offerings. DigiCore, a fleet telematics and vehicle-management business, was acquired on October 5, 2015, after quarter-end. The company reported one operating segment.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $54.6 million | $44.3 million | $162.9 million | $129.9 million |
| Gross profit / margin | $14.5 million / 26.5% | $10.5 million / 23.7% | $42.4 million / 26.0% | $24.5 million / 18.9% |
| Operating loss | $(7.5) million | $(3.9) million | $(23.5) million | $(30.2) million |
| Net loss | $(20.8) million | $(8.8) million | $(37.9) million | $(35.2) million |
| Basic and diluted loss per share | $(0.38) | $(0.23) | $(0.73) | $(0.99) |
Q3 revenue increased 23.1%; mobile-computing revenue rose 6.8% to $37.1 million and M2M revenue rose 82.7% to $17.4 million, largely reflecting FW and product mix. For the nine months, revenue increased 25.4%; mobile computing grew 18.5% and M2M grew 47.1%. Management attributed improved gross margins to higher-margin product mix, a larger M2M contribution and, year to date, the absence of substantial inventory obsolescence provisions recorded in 2014.
Operating expenses were $22.0 million in Q3 versus $14.4 million a year earlier. Q3 general and administrative expense was $9.1 million, including acquisition costs, contingent earn-out expense and FW costs. The larger Q3 net loss primarily reflected a $10.5 million non-cash loss from the South African rand’s weakening against the dollar on the DigiCore acquisition escrow. For nine months, that escrow loss was $10.3 million. Interest expense also increased following the convertible-note issuance.
Cash flow, debt and liquidity
- Cash and equivalents were $10.2 million at September 30, 2015, down from $17.9 million at December 31, 2014. Working capital was $41.3 million.
- Nine-month operating cash use was $26.3 million, compared with $9.5 million in 2014. Investing cash use was $98.6 million, principally associated with FW and the DigiCore escrow; financing provided $117.6 million.
- The company had $120 million principal amount of 5.50% convertible senior notes due 2020. Their balance-sheet carrying amount was $80.4 million after unamortized discount and issuance costs; the reported effective interest rate on the liability component was 18.71% for the period since issuance through September 30.
- The $25 million revolving facility had no borrowings outstanding at quarter-end; approximately $17.6 million was available based on eligible receivables. The company reported compliance with its financial covenants.
Management said cash, revolver availability and anticipated operating cash flows should be sufficient for working-capital needs over the next 12 months, while cautioning that failure to meet its operating plan could require spending reductions or additional financing. DigiCore closed after quarter-end for approximately $79 million cash; the acquisition was funded through escrow and the company disclosed the closing in this filing.
Material changes, outlook and risks
- FW contributed $5.5 million of Q3 revenue and $17.7 million for the nine months following its acquisition. The purchase price was approximately $24.8 million, with up to $25 million additional earn-out consideration; $4.0 million was accrued as earned at September 30.
- Management planned to introduce additional 4G broadband, M2M and software products over the next 12 months. It provided no specific revenue, earnings or margin guidance. It said R&D and selected sales and marketing investment would continue, alongside cost reductions.
- Revenue concentration is significant: the largest customer represented 64.2% of Q3 revenue and 56.0% of nine-month revenue. Contract manufacturing and component availability are additional operating dependencies.
- Key acquisition risks include integration costs, retention of employees and customers, realization of expected synergies, and converting DigiCore’s reporting and controls to U.S. requirements. International expansion adds foreign-exchange, regulatory, tax, data-privacy, cybersecurity and anti-corruption exposures.
- The company remained loss-making and had a three-year cumulative loss position; it maintained a $104.4 million valuation allowance against $104.4 million of net deferred tax assets. Potential ownership changes could also limit use of tax-loss and credit carryforwards.
- Novatel disclosed U.S. patent-infringement matters and customer indemnification obligations; management did not expect existing matters to have a material adverse effect, but indemnification exposure could not be estimated. The filing also describes a 2015 restructuring initiative, including facility-exit costs, expected to continue through June 2020.
Important facts for investors to verify
- Whether customer concentration—especially the largest customer’s 64.2% share of Q3 revenue—persists or declines.
- Post-close DigiCore purchase accounting, integration costs, actual synergies and the impact of rand movements on results and cash needs.
- Convertible-note terms and the substantial difference between $120 million principal and $80.4 million carrying value, including future interest expense and potential dilution or cash settlement.
- Cash burn, revolver borrowing availability and progress toward profitable operations.
- FW earn-out accruals and payments, restructuring costs, and any material developments in litigation or tax-loss carryforward limitations.