Business context and reporting period
Novatel Wireless, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2013; comparisons are with the three and six months ended June 30, 2012. The business sells mobile broadband devices, embedded wireless solutions and machine-to-machine (M2M) products and services. The request identifies Inseego Corp., while the filing names Novatel Wireless, Inc.; verify the issuer/entity mapping.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $91.1 million | $102.4 million | $177.0 million | $202.6 million |
| Gross profit / margin | $19.0 million / 20.9% | $23.3 million / 22.7% | $35.9 million / 20.3% | $44.2 million / 21.8% |
| Operating loss | $7.7 million | $4.4 million | $16.9 million | $42.3 million |
| Net loss | $7.9 million | $4.5 million | $17.0 million | $42.4 million |
| Net loss per share, diluted | $0.23 | $0.14 | $0.50 | $1.31 |
For the first half, operating cash flow was positive $6.5 million, versus cash used of $23.5 million in 2012. Investing activities provided $1.1 million and financing activities provided $1.3 million. Cash and cash equivalents were $24.9 million at June 30. Cash, cash equivalents and marketable securities totaled $57.7 million, excluding $1.6 million of restricted securities. Working capital was $43.9 million. Total liabilities were $80.4 million; outstanding short-term margin borrowings were $1.6 million, payable on demand, under a facility with a $4.4 million borrowing limit. The bank may liquidate pledged investments to recover amounts due.
Material changes versus prior comparable periods
- Q2 revenue declined 11.1%; first-half revenue declined 12.6%. Mobile Computing revenue fell 12.7% in Q2 and 14.7% for the half, primarily due to lower average selling prices. M2M revenue increased modestly, attributed to sales of the HS3001 module.
- Gross margin contracted 1.8 percentage points in Q2 and 1.5 points for the first half, amid lower selling prices, higher inventory obsolescence provisions and, for the half, higher warranty expense.
- Q2 net loss worsened from $4.5 million to $7.9 million, including higher legal expense. First-half net loss improved from $42.4 million to $17.0 million, chiefly because 2012 included $29.3 million of goodwill and intangible-asset impairment charges.
- First-half operating cash flow improved substantially, supported by working-capital movements, including reduced receivables and inventory and increased accounts payable. This improvement should not be assumed to recur.
Outlook, commentary, risks and unusual items
- Management expected to introduce additional 4G broadband-access products, M2M solutions and software applications and platforms over the next 12 months. It planned approximately $4.5 million in discretionary capital expenditures over that period and believed available resources and anticipated operating cash flows would meet working-capital needs for 12 months. No specific revenue or earnings guidance was provided.
- Management cited intense competition and downward average-selling-price pressure, customer demand and product mix uncertainty, and the need to invest in research and development. It identified dependence on a small number of customers, outsourced manufacturing and component suppliers as risks. The largest customer represented 65% of Q2 revenue and 63% of first-half revenue.
- Professional legal expense was $3.0 million in Q2 and $5.3 million in the first half, versus $1.7 million and $2.7 million, respectively, in 2012. The company recorded approximately $0.8 million related to legal settlements during Q2. A securities class action remained pending, with trial scheduled for January 6, 2014; the company said a possible loss range could not be estimated and had not recorded a significant accrual. Patent litigation and related indemnification obligations also remain risks. A separate Canadian trademark matter was dismissed in March 2013 without payment.
- A $72.7 million valuation allowance was recorded against $73.2 million of net deferred tax assets at June 30, 2013, contributing to an insignificant effective tax rate. The company reported no material change in market-risk disclosures or risk factors from its 2012 Form 10-K, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the filing issuer and its relationship to the company identified in the request as Inseego Corp.
- Assess whether revenue declines and gross-margin pressure, particularly in mobile broadband, continued after Q2 2013.
- Review the durability of positive operating cash flow and liquidity, including reliance on working-capital changes and the demand margin facility.
- Track customer concentration, especially the largest customer’s share of sales, and any customer or contract-manufacturer disruptions.
- Check subsequent developments in the securities and patent litigation, settlement costs, and the deferred-tax valuation allowance.