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Novatel Wireless Inc. (NVTL - Analyst Report) posted dismal financial results for the second quarter of 2013. On a GAAP basis, net loss in the reported quarter was $7.9 million or a loss of 23 cents per share compared with the year-ago net loss of $4.5 million or a loss of 14 cents. The figure was wider than the Zacks Consensus Estimate of a loss of 16 cents per share.

Total revenue in the reported quarter stood at $91.1 million, down 11% year over year and also below the Zacks Consensus Estimate of $93 million. The year-over-year decline in revenues was mainly attributed to subdued performance in the Mobile Computing Product segment. Segment wise, Mobile Computing Products generated revenues of $80.8 million, down 12.7% year over year. M2M Products and Solutions revenues were $10.3 million, up 4% year over year.

Quarterly gross margin was 20.9% compared with 22.8% in the year-ago quarter. Operating expenses in the reported quarter were $26.8 million compared with $27.7 million in the year-ago quarter. Quarterly operating loss was $7.7 million compared with $4.4 million in the year-ago quarter.

During the second quarter of 2013, Novatel generated $4.6 million of cash from operations compared with cash consumption of $5.2 million in the year-ago quarter. Free cash flow was $3.7 million compared with a negative $7.6 million in the prior-year quarter. At the end of the second quarter of 2013, Novatel had approximately $46.1 million in cash and marketable securities on its balance sheet compared with $54.1 million at the end of 2012. The balance sheet of Novatel remains debt free.
Financial outlook

Management provided revenue guidance for the third quarter of 2013 of $90–$100 million. Non-GAAP gross margin is expected to be between 21% and 22%. Non-GAAP earnings per share are anticipated in the band of a loss of 14 cents per share to 2 cents per share.

Our Take

Novatel has launched its innovative touchscreen MiFi 2 product with AT&T Inc. (T - Analyst Report). The company also launched MiFi 2 in collaboration with Canada’s largest LTE service provider, Bell Canada. Novatel also plans to launch the next generation Wi-Fi hotspot with Sprint Corporation (S - Analyst Report) in the second half of 2013.

Recently, Verizon Wireless, a subsidiary of Verizon Communications Inc. (VZ), launched Novatel’s MiFi 4620 with an expanded battery backup. Novatel further introduced a second variant of MiFi called MiFi 5510L, with Verizon Wireless in the first quarter of 2013, which is more cost effective.

However, we anticipate a gradual increase in competition for Novatel’s MiFi product line. Several versions of smartphones have an inbuilt WiFi capability. Low-cost Asian manufacturers, including ZTE and Huawei Technologies, have already launched their own versions of intelligent mobile hot spots. This is exerting competitive pressure on Novatel. Intensifying competition for embedded modules is also a major concern for the company.

Currently, Novatel carries a Zacks Rank #3 (Hold).


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