INSEEGO CORP. (Registrant: Novatel Wireless, Inc.) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The filing identifies the registrant as Novatel Wireless, Inc.; it describes a provider of mobile broadband, hotspot, modem, embedded and machine-to-machine (M2M) wireless products and solutions.
Key financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $92.7 | $71.0 | $269.7 | $273.6 |
| Gross profit / margin | $20.4 / 22.0% | $14.6 / 20.6% | $56.3 / 20.9% | $58.9 / 21.5% |
| Operating loss | $(4.9) | $(31.9) | $(21.8) | $(74.1) |
| Net loss | $(5.1) | $(31.9) | $(22.1) | $(74.4) |
| Basic and diluted loss per share | $(0.15) | $(0.97) | $(0.65) | $(2.28) |
- Revenue and segments: Q3 revenue rose 30.5%, led by Mobile Computing Products revenue of $84.1 million, up 29.0%; M2M revenue was $8.6 million, up from $5.8 million. For nine months, revenue declined 1.4%: Mobile Computing fell 3.3% to $240.5 million, while M2M increased to $29.2 million from $25.0 million.
- Margins and costs: Q3 gross margin improved year over year, attributed to higher average selling prices and lower purchased-intangible amortization. Nine-month gross margin declined, with lower average selling prices and higher inventory obsolescence provision cited as factors. Q3 included $2.4 million of restructuring charges.
- Cash flow: Nine-month operating cash use was $4.2 million, compared with $22.8 million in 2012. Investing activities provided $4.4 million, including net marketable-securities sales, partly offset by $5.0 million in capital expenditures. Financing provided $1.9 million, principally from margin-facility borrowing net of repayments.
- Liquidity and debt: At September 30, cash and cash equivalents were $18.1 million and marketable securities were $27.3 million, including $2.4 million restricted; total cash and securities excluding restricted securities were $45.4 million. Working capital was $47.6 million, down from $67.2 million at December 31, 2012. The short-term margin loan was $2.4 million at quarter-end; the company reported a $3.6 million borrowing limit. The loan is payable on demand and secured by cash and securities. An additional $3.5 million was borrowed in October and remained outstanding when the report was filed.
Material changes and unusual items
- Q3 and nine-month 2013 results had no goodwill or intangible-asset impairment charges, versus $20.5 million in Q3 2012 and $49.8 million for nine months 2012. This was a major factor in the narrower reported losses.
- In September, the company began restructuring, closing its Calgary development site, consolidating some supply-chain activities and eliminating 72 positions. It recorded $2.4 million of charges, with $2.1 million accrued at September 30. Management expected the recorded liability to be paid by year-end, plus approximately $0.6 million of further severance and $0.5 million of facility-exit costs in Q4.
- Legal expenses were $7.0 million for nine months, versus $3.7 million in the comparable 2012 period; the company also recorded approximately $0.8 million related to legal settlements during the nine-month period.
- The largest customer accounted for 59% of Q3 revenue and 61% of nine-month revenue in 2013, a significant customer concentration.
Outlook, risks and contingencies
- The filing gives no specific revenue or earnings guidance. Management expected to introduce additional 4G broadband-access products, M2M solutions and software products over the following 12 months and planned approximately $3.5 million in discretionary capital expenditures during that period.
- Management believed cash, marketable securities and anticipated operating cash flows would be sufficient for working-capital needs over the next 12 months. It cautioned that liquidity could be impaired by business interruptions, failure to meet commitments or weaker product revenue; additional financing might be needed, with no assurance it would be available on acceptable terms.
- Management cited intense competition and pressure on average selling prices, customer and product demand uncertainty, reliance on contract manufacturers and some sole-source components, and dependence on wireless operators and a small number of customers.
- A securities class action remained pending; the court set a January 6, 2014 trial date. The company said it would defend the case, had not accrued a significant liability because a loss was not considered probable, and could not estimate a possible loss range. Patent matters were also pending; management did not believe existing matters would materially affect the company’s financial condition or results.
- Most deferred tax assets were offset by a valuation allowance: $74.0 million against $74.1 million of net deferred tax assets at September 30. The company reported ongoing tax examinations and uncertain audit outcomes.
Important facts for investors to verify
- Whether the Q3 revenue rebound is sustainable, given the nine-month decline and concentration in one customer.
- Whether margins can hold or improve amid competitive pricing, inventory provisions and changing product mix.
- Cash burn, working-capital trends, and the company’s use of the demand-payable, collateralized margin facility, including the October borrowing.
- The final cash costs and operational impact of the restructuring and facility closures.
- Developments and potential costs in the securities class action, patent litigation and related legal matters.
- Whether expected operating cash flows and available liquidity can fund planned investment and ongoing operations without additional financing.