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Still Neutral on Novatel

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We maintain our Neutral recommendation on Novatel Wireless Inc. . The company reported weak financial results for the third quarter of 2012. Quarterly net earnings narrowly missed the Zacks Consensus Estimate, however,  the revenue significantly fell below the same. The annualized downside in revenue was owing to subdued performance in both its Mobile Broadband Device and Embedded Solution segments. In the reported quarter, Novatel incurred a goodwill and intangible asset impairment charge of $20.5 million.

Importantly, management has provided a very  lacklusture guidance for the ensuing fourth quarter of 2012. We do not expect Novatel to achieve profitability any time soon. Precipitous losses may jeopardize its healthy balance sheet going forward. Competitions from low-cost Asian manufacturers together with a highly concentrated customer base are the other headwinds. Nevertheless, the stock price is currently at its trough, which may provide a cushion for further downslide.

Novatel is concentrating on three types of products: (1) 4G-enabled data transmission products (2) M2M intelligent asset management products (3) Insurance telematics and fleet management products. According to ABI Research, the number of global insurance telematics users are expected to grow at a CAGR of 90% to reach 89 million by 2017. This is a vast untapped market and generates huge revenue potential for Novatel.

Novatel has launched its innovative touch screen MiFi 2 product with AT&T Inc. (T - Free Report) . The company is hopeful to launch this product with other carriers in 2013. Recently, Verizon Wireless has launched Novatel’s MiFi 4620 with an expanded battery backup. Verizon Wireless is a joint venture between Verizon Communications Inc. (VZ - Free Report) and Vodafone Group plc. (VOD - Free Report) . Novatel will introduce a second variant of MiFi with Verizon Wireless either in the ensuing fourth quarter or the first quarter of 2013 which will be more cost effective.

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