Novatel Wireless, Inc. (NVTL) Q4 2012 Earnings Call February 21, 2013 5:00 PM ET
Matthew Hunt - The Blueshirt Group
Peter Leparulo - Chairman & CEO
Ken Leddon - SVP & CFO
Bryan Prohm - Cowen & Company
Cobb Sadler - Catamount Advisors
Good day and welcome to the Novatel Wireless, Inc. Fourth Quarter 2012 Earnings Conference Call. All participants will be in listen-only mode. (Operator instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator instructions) Please note this event is being recorded.
I would now like to turn the conference over to Matthew Hunt, Blueshirt Group for Investor Relations. Please go ahead.
Good afternoon and thank you for joining us on our fourth quarter and fiscal year 2012 conference call. We’ll begin with a business overview and outlook from Chairman and CEO, Peter Leparulo followed by a financial overview and guidance from Chief Financial Officer, Ken Leddon. We’ll then open the call for questions.
As a reminder, this conference call is being broadcast on Thursday, February 21, 2013 over the phone and internet to all interested parties. The information shared in this call is effective as of today’s date and will not be updated.
During this call, non-GAAP financial measures will be discussed. A reconciliation to the most directly comparable GAAP financial measures are included in the earnings release which is available on the Investors Relations section of our website. An audio replay of this call will also be archived there.
Please also be advised that today’s discussion will contain forward-looking statements. These forward-looking statements are not historical facts, but rather are based on the company’s current expectations and beliefs. For a discussion of factors that could cause actual results to differ materially from expectations, please refer to the risk factors described in our Forms 10-K, 10-Q and other SEC filings which are available on our website.
Now, I would like to introduce Peter Leparulo, Chairman and Chief Executive Officer of Novatel Wireless. Peter?
Good afternoon everyone and thank you for joining our call today. Our fourth quarter continued to be a period of building for the company as we executed on the strategy and businesses decisions that we outlined last quarter. We continue to make key progress on our strategic initiatives in both mobile computing and M2M and we are expecting significant sequential revenue growth and bottomline improvement in the first quarter as we realign the business to return to profitability and sustainable growth.
We believe the steps we have taken fundamentally position the company for a much better 2013. In mobile broadband, our focus remains to lead the market in innovation, expand our customer base, expand our product set at existing customers and address new markets enabled by 4G networks. We've made progress on these initiatives with two new product launches since our last report. MiFi 2 launched by AT&T as MiFi Liberate and our MiFi 5510L launched by Verizon Wireless.
MiFi 2 which launched in the middle of the fourth quarter with AT&T has taken mobile hotspots to the next levels. It is the first mobile hotspot with a touch-screen display, functionality that was once on a web page is now at the user’s fingertips. MiFi 2 has a breakthrough user experience in terms of discoverability and interactivity with one-touch features for accessing data usage summary, on-board shared storage, location based services and support. It's local media server allows users to share movies, music, presentations and photos from micro-SD cards and broadcast these files straight from the device to DLNA-enabled TVs or other devices. MiFi 2 also has a full work day of connectivity with live 4G streaming and supports global data connection.
The MiFi 2 has garnered critical acclaim from such publication as PC Magazine, ZDNet and GIZMODO, whose editor declared it the best mobile hotspot I’ve ever used. It is now approaching full channel launch, including AT&T stores and B2B channels and is just beginning to roll out with national retailers such as Best Buy with some expansion to additional national retailer’s plant. We are now working to launch MiFi 2 with other carriers in 2013.
More recently, we announced the launch of the MiFi 5510L with Verizon at the end of January; following the roll out of our extended battery MiFi 4620LE last quarter. The 5510L device is our fifth-generation 4G LTE Mobile hotspot and is positioned as the cost competitive value product at the carrier. While the extended battery MiFi 4620LE, which we discussed last quarter, is positioned as the premium product with this carrier. The 5510L is the first mobile hotspot launched with real-time data usage reporting on the Verizon network and also has key performance indicators to address this market segment.
As we move forward, we’re working to expand sales from our new product lines and are working closely with all three major U.S. carriers to bring new products to market in the future. Looking ahead, we continue to see the operators expand used cases by 4G data networks enable including in-vehicle services and advanced home connectivity services over 4G networks. We have the design wins and carriers for next-generation LTE solutions carrying us into 2014, and we look forward to sharing our progress.
In the M2M business, we believe that the work we did in 2012 has laid the foundation for significant improvement in 2013, building upon key design wins from 2012. Sequentially, we grew this business 16% principally as a result of our new asset management product portfolio as well as key design wins and new customer expansion.
Here are some data points on how our portfolio and real line sales efforts are leading the way in this space. In 2012, we had more than 100 new design wins comprised of over 50 new customers who had not purchased products from us in the prior year and existing customers who purchased new products during the year. Certainly, some of these will scale through revenue on different trajectories as these wins cover a wide range of customers and products. Nonetheless, we are engaged with more customers on larger potential deployments with more opportunities for long-term partnerships.
Based on current projections, we anticipate that approximately 50% of our Q1 forecast in the M2M is expected to be from these new products and going forward we believe we will see ongoing improvement from the better product mix from larger customers in more defensible verticals.
Let me now spend sometime detailing developments in our M2M business. In our M2M asset management solutions, we are focused on four key vertical markets; commercial telematics including fleet management, asset tracking, after market consumer telematics and fixed telemetry.
We are seeing a lot of activity across these verticals engaging with top customers and are aggressively pursuing growth in this business. We see long-term growth prospects in both commercial telematics and asset tracking. We are also excited about after market consumer telematics and relatively new market for so-called context applications such as usage based insurance.
These are markets where we have a sustainable competitive advantage for three reasons. First, we control the major touch points in the support chain including module development, our own firmware, GPS, and security.
Second, these markets have high switching costs since our devices and firmware are integrated into the customer’s M2M applications such as cloud based platforms for fleet tracking applications or cross detecting protocols in UBI applications.
And third, our core strengths best in class product performance and customer support are critical to these verticals. All of these give us a unique value proposition that underlies our momentum in this space. We've recently launched three products to address the three targeted verticals.
During the fourth quarter, we launched our MT 4100 platform for CDMA networks and shifted our first units to FleetMatics in December. Designed for fleet management application providers and enterprise customers, the MT 4100 is a full featured telematics solution that delivers critical features to drive fleet efficiencies and reduce operational costs. The MT 4100 launch with FleetMatics was supported by our M2M device management software platform which is integrated into the FleetMatics service platform.
Last month, we announced the commercialization of our MT 3050 OBD-II product for CDMA on the Verizon Wireless network. The first shipments of these are for NexTraq, a leader in commercial telematics that provides a cloud based fleet management platform. The modular design of this mobile tracking device helps to reduce upfront installation costs for insurance telematics and fleet management applications and ultimately helps customers improve productivity and reduce costs in managing their vehicles.
We are also seeing exciting opportunities for this product in the consumer telematics vertical, given its user friendly plug and play installation process. And we are currently complementing this week with the launch of the GPRS version of our MT 3050 OBD solutions.
In our fourth target vertical fixed telemetry, we launched a CDMA version of our SA Series in the fourth quarter and we will soon begin shipments. The SA Series is a standalone telemetry solution that brings our M2M capabilities to areas like smart metering and remote maintenance and control applications by connecting point of sale terminals, vending machines or smart meters to the internet and intelligently providing usage monitoring and performance verification.
We now have a full suite of CDMA solutions for all four of our targeted verticals including our MT Series, self-installed OBD-II form factors and SA Series for fixed telemetry. We also made progress on our M2M embedded initiatives to lay the groundwork for growth again with 2012 design wins leading the way.
We continue to migrate existing customers on low margin 2G to higher margin newer technologies, beginning with CDMA. We have substantial CDMA design wins at both existing and new customers. With 2012 design wins beginning to launch, we expect to see revenue and margin expansion to follow in our M2M embedded business.
In summary, for the overall business, we're wrapping up a tough year. However, as we realigned the company to a more competitive overall position, we're seeing a healthy pipeline of new opportunities in our target markets. Moreover, with the progress we have made on our strategic initiatives, we're confident that we're headed in the right direction.
With that, I would like to turn the call over to Ken to go over the financials in more detail.
Thank you, Peter. I will begin with a financial overview of the fourth quarter and then will provide our outlook for the first quarter of 2013. Revenue for the fourth quarter was $70.7 million within the range we forecasted last quarter. To break that revenue performance down by business segment, our mobile computing revenue in the quarter was $63.9 million. This includes $47.9 million of MiFi revenues, $10.2 million of USB modems, combination cards and related products and $5.8 million from our PC OEM business. And our M2M products and solutions totaled $6.8 million.
From a geographic perspective, sales in North America accounted for approximately 96% of total revenue. Our operating loss for the quarter was $14.6 million and our net loss for the fourth quarter was $14.9 million or a loss of $0.45 per share. These quarterly results include the following non-cash charges or adjustments.
Share based compensation expense of $1.1 million, employees stock purchase plan cancellations charges of $1 million, and the intangible asset valuation increase of $300,000; depreciation and amortization up $2.6 million and net deferred income tax asset charges of $300,000. These non-cash charges or adjustments totaled $4.7 million or $0.14 per share.
I will now discuss our non-GAAP results for the quarter. Today’s press release provides the reconciliation of our GAAP to non-GAAP fourth quarter results. Non-GAAP gross margin in the fourth quarter was 19.6%. This is the lower guidance level of 22% to 24% and was impacted by inventory valuation adjustments in a less favorable product mix.
Non-GAAP operating expenses totaled $26.4 million and looking at operating expense by category R&D expense are $14.4 million compares to the prior quarter of $14.1 million as we continue to invest in our M2M portfolio and new developments in our MiFi product line.
Sales and marketing expenses were $5.9 million compared with the prior quarter and G&A expenses were $6.1 million up from $4.2 million in the third quarter due to legal expenses related to IP defense and litigation settlements, as well as an increase in allowance for doubtful accounts.
Our non-GAAP operating loss was $12.6 million or a loss of $0.38 per share. Shares outstanding at the end of the quarter were 33.7 million. Fourth quarter capital expenditures were $0.5 million and we ended the quarter with cash and marketable securities of about $55 million.
Now turning to fiscal year 2012; revenue for the year was $344.3 million. Our GAAP operating loss was $88.7 million and our net loss for the full fiscal year was $89.3 million, or a loss of $2.72 per share. These results included non-cash charges or adjustments consisting of shares based compensation expense of $6.5 million, employee stock purchase plan cancellation charges of $1 million, goodwill and intangible asset impairment charges of $49.5 million, depreciation and amortization of $12.3 million and deferred tax asset charges of $400,000. These non-cash charges totaled $59.7 million for the year.
Now, turning to our non-GAAP results for the year, non-GAAP operating loss was $28.1 million and our non-GAAP net loss for the year was $28.2 million or a loss of $0.86 per share. Again, today's press release provides a reconciliation of GAAP to non-GAAP results for 2012.
Looking ahead, for the first quarter of 2013, we are forecasting sequential improvement in both our mobile computing and M2M businesses. Our guidance range is relatively wide due to the uncertainty around the sell-through volumes of the two new MiFi products and uncertain timing of other product launches. We currently expect the first quarter revenues to be in the range of $83 million to $93 million as we generate revenue from a number of new products and customers as Peter previously discussed. We anticipate that non-GAAP gross margins in the first quarter will be in the range of 22% to 24% of sales. Finally, we expect non-GAAP EPS to be in the range of $0.19 to $0.07 loss per share. These estimates are based on approximately 34 million shares outstanding.
Now I will turn the call back to Peter for closing remarks.
Thanks very much Ken. In summary, while the fourth quarter continued to be part of the transactional period for the company, we have made important progress in our business that sets us up for a better 2013. In mobile broadband, our focus remains to lead the market in innovation, expand our customer base and expand our product set at existing customers. We will continue to work closely with leading carriers on new design wins and bringing new products to market. And in M2M, we aim to continue to grow our generation skipping product portfolio, win new customers and expand with existing ones building upon the new customer traction we began last year.
And with that, Ken and I would now be happy to answer any questions that you might have. Operator please open up the line for Q&A.
We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Mike Walkley of Canaccord Genuity. Please go ahead.
This is [Sid] on for Mike. Peter, a couple of quick questions. Firstly, just wanted to talk about the competitive dynamics which you are seeing at Verizon with regards to your low cost Chinese competitor ZTE, given that you've launched the two recent products in the last quarter or so and especially your cost competitive MiFi 5510L, what kind of market share gains or losses or what kind of market share gains or losses or what kind of pricing pressure are you seeing at Verizon currently?
I think the competitive dynamics at Verizon are that we currently occupy the high-end skew of the Verizon, the premium skew with our 4610, with the extended battery that we launched in Q4. You are right in suggesting that we have been impacted at the low end and have to share that segment channel position with another competitor, a low end competitor. What we believe will happen is that the introduction of our new mobile hotspot addresses that value position at Verizon. Generally, Verizon has segmented the market into two different skews, the high end and the low end. So as we see things currently, we expect to have both positions. The market dynamics, the landscape dynamics, it can change in ebbs and flows but that product that we launched right now is meant to address that low end value position with greater performance indicators than that segment of the market has been addressed in the past.
Great, thanks. And just to follow-up, given that one of your key competitors has recently exited the mobile hotspot space by selling the business. Just wanted to know what kind of opportunities do you see given these temporary hiatus in terms of winning business in both AT&T as well as potentially Sprint?
That’s a good question. I think, Sid, we’ll see; the mobile computing business, as you know, is a lot more complex than parties originally anticipate when they enter into it in terms of the intensity of support and the intensity of development and milestone driven business; we have to put a quite a bit of infrastructure around the operator customers to achieve that. We don't under estimate anybody in that space, but I think we will have to see where that goes.
In terms of additional operators, I think we have talked about on previous calls that we expect to have channel positions in North America at all three major operators and we are a development partner with each of those three major operators. But as I said, we will see what the landscape looks like on given their exit from that space.
The next question comes from Cobb Sadler of Catamount Strategic Advisors. Please go ahead. Mr. Sadler, please go ahead. (Operator Instructions) The next question will come from Bryan Prohm of Cowen & Company. Please go ahead.
Bryan Prohm - Cowen & Company
On numbers that I wanted to take up, but I didn't hear, LTE as a percent of revenue in the quarter was that stated in release or on the call, I am not sure that I caught it?
This is Kenneth speaking, no we did not take that in the release, but it was a very significant amount was the majority of our business in Q4 as far as mobile computing business goes, we have very a limited 3G business or legacy products in the mobile computing arena right now.
Bryan Prohm - Cowen & Company
The legacy products especially in MiFi given the limited footprint of 4G globally, is that a business that you anticipate continuing through ’13 at least to some degree or maybe that's not in North American business but at least on an international basis, is that an opportunity?
Well, I think in terms of how 4G goes even in North America, the market does not stagnate in terms of where the interfaces go. So the way we see it is that there is a carrier aggregation upgrade in North America that will address with that market, with that product line. There's also quite a bit of bandwidth dispersion as LTE upgrades particularly at Sprint.
So there is still opportunity in that space with upgrade cycles in North America and we have design wins on that into 2014. I'll also say that because of 4G as it becomes more ubiquitous in North America, we believe that there are adjacent products and adjacent markets that the operators will address such as in vehicle and home connectivity and those are spaces that we also look forward to addressing with carrier partners.
Bryan Prohm - Cowen & Company
Yeah you mentioned in your prepared remarks, is that something that you see as potentially driving revenue in ’13 or is that more of a longer term opportunity once LTE is more mature?
I think once LTE actually is, it doesn't have to get to LTE only for that but LTE, the coverage on LTE is pretty expensive at the lead carriers in terms of POP coverage. So with that and with the efficiency and capacity of that LTE allows and the efficiency of data usage for byte usage, we actually see that taking place in 2013 to begin to take place in 2013 and then to expand out in 2014.
The next question comes from Cobb Sadler of Catamount Advisors. Please go ahead.
Cobb Sadler - Catamount Advisors
On LTE hotspot business I guess overall business 96% of revenues in North America but you know there's 60 LTE networks, 60 countries with at least one LTE network up and running I mean, can your international business grow? Are you targeting those carriers or just trying to take share within the US?
Cobb we are focused on the US. We look to the additional LTE rollouts but we look to it on a targeted basis. Even though, the LTE protocol is being deployed there are quite a bit of as I said bandwidth dispersions on it. So it’s not as though all of the R&D development that we do in North America can be leveraged into those markets. Some of it can but we look to that more outside the US more on an opportunistic basis to make sure that we can get an ROI for the additional development that we would have to do for that.
Cobb Sadler - Catamount Advisors
And do you think the international deployment will go up from 4% to higher number a year out, two years out?
I actually think that if you turn to the M2M side that's where we believe that our international growth will come from, mostly in Europe and Latin America on the M2M side is what we are focused on in investing our R&D dollars in.
Cobb Sadler - Catamount Advisors
And then just I had a question on with MiFi Liberate by AT&T. Do you have internal or can you share with us what was your internal market share forecast is at the carrier? It's a new product, it’s a relatively, the nominal revenue in AT&T and you know, what percent of that market or the LTE hotspot market do you think that you might be able to get eventually at AT&T?
It's fairly early right now, and it's hard to tell the precision because the market share really in part is reflected by how many points of sale there are for the product, and we launched an AT&T stores, we launched in B2B channels and as I said, it’s just getting into some national retail. So it's a little bit difficult to tell. I can tell you that AT&T in Q4 was a 10% customer [routers] and that was with a partial quarter launch.
Some of those very well could be initial stocking orders that's it's difficult to tell, selling versus the ordering patterns on it but nevertheless, I will say that we believe that the performance indicators on that product, the usability of that product and the feedback that we got on the product both from the press as well as anecdotal feedback from the channels are that it really has advanced the MiFi product category with much greater interactivity and much greater in each cases.
We will see if that translates into greater ARPU but in terms of the functionality of that product, the user experience, we think it's the best one out there and we're as excited as you to see the channel position on that product.
Let me just add. I also would highlight that that is a product where we can leverage the R&D done on that with additional carriers because of commonality with different bandwidth and that’s what we are also focused on doing to them to expand that product into other carriers.
Cobb Sadler - Catamount Advisors
Great, and just moving on to Verizon, can you talk about what is the size of the low end versus high end market, as B2B gave you a hard time at the low end hopefully gain all that share back for at least a while but, how big is the low end relative to high end, do you think at Verizon?
It’s a good question, I really can only speak somewhat anecdotally and somewhat from the gut on that, but we believe that most cost driven sales are done at company on stores, national retailers as well typically promote only one product and that often is the product that as well drives cost driven sales on it.
The B2B channels are tend to stay with the incumbent product because of the reliability the brand frankly and the known performance to the types of equipment. My sense is that probably comes out to about a 50-50 split.
Cobb Sadler - Catamount Advisors
Okay, great and then just on valuation, you got some of recent comp --- share (inaudible) other business when market share is losing business at that for putting up 0.6 to sales and I look to your new sales for the entire company its certainly less than $10 million, how do you explain the severity and what were the plans to basically leverage the value realized in inheriting a company?
We believe that mobile computing is still a grown market and in the future it will grow as well and certainly the operators are heavily focused on wireless data. As I said, how we will grow in mobile computing is really by two ways. We believe as we move forward, the R&D will be able to be much more efficient with a common architecture in both 3G and 4G supporting many platforms, many devices in both mobile computing and M2M.
As that R&D becomes more efficient, our goal is to have our growth drivers on the revenue cover that R&D much more effectively. That applies both to the mobile hotspot product category as well as some of the additional adjacent products that I suggested as we get towards the second half of the year. Those products will as well be able to leverage the core architecture that we use for mobile hotspots.
So with that, we think that revenue will scale and cover the R&D much more efficiently. You are absolutely right though, the challenge in this space has been that the R&D has gone up per product, the products have become more complex and the market has been divided somewhat. That will start to reconsolidate if you will the way we see it going forward and allow us to get some leverage built into both our into our business model overall.
Cobb Sadler - Catamount Advisors
Have you seen similar buyers to net year I mean or was the CR asset the only one that was being looked at or do you think that, have you heard some of the other interested buyers I guess is the question?
Yeah, that's, I don't if who and how that transaction took place, I mean what you are talking about in terms of us, we are focused on executing our own strategy at this time and I'm not sure this will be the forum to (inaudible) in any event.
(Operator Instructions) There are no further questions. This concludes the conference. Thank you for attending today's presentation. The conference replay will be available after 06:45 PM Eastern Time. To listen, you may dial 412-317-0088 or 877-344-7529. When prompted please enter conference number 10024586. Thank you. You may now disconnect your lines.
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