Novatel Wireless, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012; filed November 9, 2012. The filing identifies the registrant as Novatel Wireless, Inc. (not Inseego Corp.). Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and financial performance
The company sells mobile broadband devices, embedded wireless solutions, and machine-to-machine (M2M) and asset-management products. Its Mobile Computing Products segment and M2M Products and Solutions segment are exposed to wireless-operator demand, competition, product transitions, and contract manufacturing.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $71.0 | $113.3 | $273.6 | $293.1 |
| Gross profit / margin | $14.6 / 20.6% | $26.7 / 23.6% | $58.9 / 21.5% | $58.9 / 20.1% |
| Operating loss | $(31.9) | $(6.0) | $(74.1) | $(31.2) |
| Net income (loss) | $(31.9) | $4.5 | $(74.4) | $(21.5) |
| Net loss per diluted share | $(0.97) | $0.14 | $(2.28) | $(0.67) |
| Cash used in operating activities | — | $(22.8) | $(26.7) |
- Q3 revenue fell 37.3% year over year; nine-month revenue fell 6.6%. Q3 Mobile Computing revenue decreased 36.5%, which management attributed primarily to lower mobile broadband device sales amid increased competition at its largest customer. M2M revenue declined as North American customers moved away from 2G GSM networks.
- Q3 gross margin declined to 20.6%, reflecting lower pricing on 4G MiFi products and higher inventory-obsolescence charges. Nine-month gross margin improved to 21.5%, with management citing higher 4G product sales and lower intangible amortization.
- Operating expenses included goodwill and intangible impairment charges of $20.5 million in Q3 and $49.8 million for the nine months. These charges drove much of the increased loss.
Balance sheet, liquidity, and debt
- At September 30, cash and cash equivalents were $16.3 million and marketable securities totaled $46.1 million, for combined cash and securities of $62.5 million, down from $88.8 million at December 31, 2011.
- Working capital was $75.7 million. Current assets were $139.9 million and current liabilities were $64.1 million. Total liabilities were $67.9 million; the balance sheet lists no separate debt balance at quarter-end.
- Nine-month operating cash outflow was $22.8 million; investing cash outflow was $8.4 million, including $4.0 million of property and equipment purchases and net purchases of marketable securities. Cash declined $30.7 million during the period.
- The company had a collateralized margin facility with a $14.1 million borrowing limit at September 30. It borrowed and repaid $5.0 million during Q3; it borrowed $9.0 million in November, outstanding at the filing date and payable on demand.
Changes, outlook, risks, and unusual items
- During 2012 the company recorded first-quarter goodwill and intangible impairment charges of $6.5 million and $22.8 million, respectively, and preliminary third-quarter charges of $13.2 million and $7.3 million, respectively. Management had not finalized the Q3 impairment measurement by the filing date; any adjustments were expected to be recognized in Q4 2012.
- Management expected to launch CDMA and 3G GSM M2M modules and integrated solutions in Q4 2012 and the first half of 2013, and anticipated additional 4G, M2M, and software products over the next 12 months. The filing provides no numerical revenue or earnings guidance.
- Management believed cash, marketable securities, and anticipated operating cash flows would meet working-capital needs for the next 12 months. It planned approximately $5.1 million of discretionary capital expenditures over that period and noted additional financing might be needed, with no assurance of availability or favorable terms.
- Customer concentration is significant: the two largest customers represented 57% and 10% of Q3 revenue and 58% and 10% of nine-month revenue. The company also relies on third-party manufacturers and some sole-source component suppliers.
- Risks include intense competition and pricing pressure, reduced demand for legacy 2G products, customer losses or product-selection changes, execution and timing of new products, inventory obsolescence, and litigation. The securities class action remained pending with no trial date set; the company said a possible loss range could not be estimated and had not accrued a significant liability. A shareholder derivative settlement was finally approved in May 2012; the company paid $0.4 million of legal fees, with $0.5 million covered by insurance.
- Tax expense was $0.1 million in Q3 and $0.3 million year to date despite losses, principally reflecting valuation allowances on deferred tax assets. The company reported a $61.0 million valuation allowance against $61.9 million of net deferred tax assets.
Most important facts for investors to verify
- Whether the preliminary Q3 M2M goodwill and intangible impairment charges were revised when finalized in Q4.
- Subsequent revenue, margins, and customer retention, particularly at the largest customer and as M2M demand shifts away from 2G.
- Cash burn, marketable-security availability, and the status and terms of the $9.0 million demand borrowing.
- Launch timing and commercial uptake of planned CDMA/3G M2M products and other new offerings.
- Developments in the securities litigation, customer concentration, and any further inventory or asset impairment charges.