Novatel Misses, Guides Higher

Novatel Wireless Inc. ( NVTL - Analyst Report ) declared its first quarter 2011 financial results after the closing bell, which fell well short of the Zacks Consensus Estimate. However, Novatel provided a strong second quarter 2011 financial outlook. As a result, shares of Novatel increased by 40 cents (7.27%) to $5.90 in the after-market trade on NASDAQ.

On a GAAP basis, net loss in the fourth quarter of 2010 was $22.1 million or 69 cents per share compared with a net income of $3.4 million or 11 cents per share in the prior-year quarter. Quarterly adjusted (excluding special items) earnings per share (EPS) were a loss of 60 cents per share, significantly higher than the Zacks Consensus Estimate of a loss of 48 cents per share.

Revenue

Total revenue in the first quarter of 2011 was $61.8 million, down 14.4% year over year, and was also below the Zacks Consensus Estimate of $70 million. The decline in total revenue was due to delay in customer orders along with sluggish product launch.

Revenue by Product Category

Revenue from Core Mobile Computing Products was $49.8 million, down 31.0% year over year. Revenue from M2M Products and Solutions was $12.0 million.

Margins

GAAP gross margin was 9.7% compared with 24.7% in the year-ago quarter. Reduction in gross margin was mainly credited to higher expenses associated with new product promotions. Operating expenses, in the reported quarter, were $28.1 million compared with $22.5 million in the prior-year quarter.

Cash Flow

At the end of the first quarter of 2011, Novatel generated a negative cash flow of $36.5 million from operations compared with a positive cash flow of $9.9 million in the prior-year quarter. Free cash flow (cash flow from operations excluding capital expenditures) at the end of first quarter 2011 was a negative $37.9 million compared with $9.1 million in the previous quarter.

Balance Sheet

At the end of first quarter of 2011, Novatel had approximately $13.7 million of cash & marketable securities on its balance sheet compared with $17.4 million at the end of fiscal 2010. The balance sheet of Novatel remains debt free.

Future Financial outlook

Management provided revenue guidance for the second quarter of 2011 in the range of $112 million–$122 million.

Non-GAAP gross margin is expected in the 21%–22% range. Non-GAAP loss per share is anticipated in the band of 10 cents to 0 cents.

Recommendation

We believe the recent acquisition of Enfora and a strong financial outlook augur well for the company in the lucrative wireless machine-to-machine (M2M) markets. However, we remain concerned regarding Novatel’s business with Verizon Wireless ( VZ - Analyst Report ) , an important customer for its MiFi intelligent hotspots. Moreover, the company is facing stiff competition from low-cost Asian manufacturers, which might hurt profitability going forward.

We thus maintain our long-term Neutral recommendation on Novatel. Currently, Novatel has a Zacks #3 Rank, implying a short-term Hold rating on the stock.