17:03: Q3 2012 Earnings Call November 7, 2012 05:00 pm ET

17:32: Q3 2012 Earnings Call November 7, 2012 05:00 pm ET

Good evening, and welcome to the Novatel Wireless Incorporated Third 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 of The Blueshirt Group Investor Relations. Please go ahead.

Good afternoon and thank you for joining us on our third quarter 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 Wednesday, November 7, 2012 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 section of our website, and 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 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.

Good afternoon and thank you for joining our call today. While Q3 was a difficult and challenging period as we anticipated, we have made substantial progress towards our goals, a clear and driving focus of Novatel Wireless is to return to profitability and position the company for long-term and sustainable growth. I want to spend our time today discussing some of our key business decisions of the quarter and how we believe this will positively impact our business moving forward. After our prepared comments, Ken and I will be happy to answer any questions that you might have. As you know, we have three primary businesses, Mobile Broadband, our OEM business selling to laptop manufacturers and our M2M business, which consist of embedded solutions and integrated platforms. Mobile Broadband had a down quarter in Q3 and as expected, we experienced hike in competition on our largest customer, as we share the channel in the quarter to lower price Chinese competitor. This competition will continue in Q4. Our products are in many channels, including company-owned stores, direct B2B sales, local and national retail and others. Although, year-to-date sales were actually higher in direct B2B channels for quality and security are highly valued, we have been impacted in consumer channels or differentiated device pricing impact sales at a more cost driven. Our focus to address all of these channels in Mobile Broadband is to continue to lead the market in innovation, expand our customer base and expand our product set at existing customers, all built up on our industry leading type of portfolio. MiFi’s results were media hub, which allows users to share movies, music and presentations. Importantly, this is also our first joint development product with AT&T. As started what we heard will be a long-term partnership with this important customer.…

Thank you, Peter. I will begin with a financial overview of the third quarter and then we’ll provide our outlook for the fourth quarter of 2012. Revenue for the third quarter was $71 million. As we expected, this quarter was a transitionary period in which we experienced a challenging environment for our legacy product sales. To break that revenue performance down by business segment, our Mobile Broadband revenue in the quarter was $65.2 million. This includes $50.2 million of MiFi revenues, $9.9 million of USB modems, combination cards and related products, and $5.1 million from our PC OEM business. Our M2M products and solutions totaled $5.8 million. From a geographic perspective, sales in the U.S. and Canada accounted for approximately 93% of our total revenue. GAAP net loss was $31.9 million or $0.97 per share. This result included the impact of an estimated non-cash and non-operational goodwill and intangible asset impairment charge of $20.5 million related to the acquisition valuation of our M2M business. In addition, our GAAP results in the quarter include non-cash charges of $1.8 million in share-based compensation expense and $94,000 of income tax adjustments. From hereon, I will discuss the results of on a non-GAAP basis. Our non-GAAP results exclude the impact of the impairment charges and stock-based compensation. Non-GAAP gross margin in the third quarter was 21.3%. This is below our guidance level of 22% to 24% due to the inventories lower our cost for market adjustments. Non-GAAP operating expenses totaled $24.2 million, down about $1.7 million from the prior quarter. Now looking at operating expense by category, R&D expenses were $14.1 million and compared to the prior quarter of $13.9 million. Sales and marketing expenses were $5.9 million, down from $6.9 million in second quarter and the G&A expenses were $4.2 million, down from…

Thanks, Ken. In summary, while the third quarter was a transitional period, we have made important progress in our business, I will set the stage for the fourth quarter and 2013. In mobile broadband, we continued to lead the market in innovation, expand our customer base, and expand our product set at existing customers. We have significantly changed our approach in the PC OEM business and we gained solid new customer traction in our M2M business. And with that and then I would now be happy to answer any questions you may have. Operator, please open up the call for Q&A.

We will now begin the question-and-answer session (Operator Instructions) The first question comes from Peter Misek of Jefferies. Please go ahead. Peter Misek – Jefferies & Co., Inc.: Thank you, gentlemen. Can we walk through a little bit potential cost reduction strategies you guys can imply in a little more detail. Where exactly do you think we can take cost out? Are we talking about sale, distribution, R&D. I know you said that you are changing the OEM model, but a little bit more clarity and color there, I’d be glad and then I have a follow-up.

Hi, Peter, this is Ken. I’ll be glad to address that. What we experienced in the OEM PC business is a lack of return on some of the, on the R&D investment we’ve made. But at the same time, we’ve got so many design wins for next year that we really have to make some priority changes. And I think a lot of the resources that were previously on the OEM PC business are being transitioned over to the new products that we believe have a much higher level of profitability at lower risk. At the same time there are some indirect costs and cost related to OEM, that are specific to OEM that will be avoided in the 2013 and end of Q4 this year. Peter Misek – Jefferies & Co., Inc.: Can you give us any color on revenue trends or sales trends through the quarter and what we are seeing so far in calendar Q4? Has there been any change in consumer spending patents behavior, for example as the iPhone 5 had any impact on MiFi sales, hotspot capability, anything like that you’ve seen that you can give us granularity on that? That’s my last question. Thank you.

We haven’t seen impact from the iPhone 5 or generally even an impact from hotspot capability on the smartphones. The things that we see are no different from other quarters in terms of operating behavior with shorter levels of inventory and shorter selling cycles. But we’ve seen that for quite some time now. Peter Misek – Jefferies & Co., Inc.: Great, thank you.

(Operator Instructions) We have a question from Bryan Prohm of Cowen and Company. Please go ahead. Bryan Prohm – Cowen and Company, LLC: Hey, good afternoon gentlemen. I apologize that I was late joining the call. There is number of different calls we’re working on this afternoon.

Sure. Bryan Prohm – Cowen and Company, LLC: Hey, could you talk a little bit about the lawsuit, the infringement lawsuit against ZTE? This is the second lawsuit against ZTE, if I recall correctly, specifically related to MiFi mobile hotspots or to mobile hotspot and wireless data modem technology that you’ve patented in the MiFi family. I probably understand is ZTE, I think Samsung as well, but we’ve also already heard about there is no impact from on sales or at least it appears to be no impact to sales momentum from Wi-Fi hotspots, it’s created into smartphones. Why the smartphone aims not to target of patent infringement lawsuits, it’s just simply the implementation of the hotspot on those devices that’s different from the standalone data only device?

It’s not, we believe that actually some of our patents could cover elements of MiFi for mobile hotspot implementation, smartphones as well. But what you do is when you initiate one of these lawsuits, several factors go into it, including what are the infringing products and what is frankly the patent portfolio, is there a defensive patent portfolio at the parties that you are looking at. ZTE in particular has a direct mobile hotspot, which competes with ours and which we believe crosses over technology that we invented. So their defending products on it are pretty much direct hits on this, which is why they’ve been a defendant. But recent lawsuit relates to the implementation of gateway of our technology, which just as you say is covered by mobile hotspots, key to mobile hotspots, it’s also key to M2M gateways any gateways. But some of the other patents that we’ve put in our prior lawsuit to have better have a defending products by ZTE against it. It includes some of the key elements of the hotspot technology. But when you look out many factors when you initiate one of these, which is we’ve done and that’s why we began these lawsuits against the defendants. Bryan Prohm – Cowen and Company, LLC: Okay, just want to clarify, is that an ITC, or there is a court lawsuit whereas this…

Sure, it’s not ITC, it’s a District Court, Federal District Court. Bryan Prohm – Cowen and Company, LLC: Okay. What’s the timeframe for, were there some timeframes that we should go watching on this trial.

Yeah, it’s hard to tell, we just initiated this and it will go through some type of mediation process. It’s a longer process than going through the ITC, so we’ll keep you abreast, but frankly it’s too early to really put timeframe on it. Bryan Prohm – Cowen and Company, LLC: Okay, understood. I apologize if this is in your prepared remarks. Of the revenue guidance what percentage of the revenue guidance relates to the new Mifi products that are coming on in the quarter roughly?

I would say it as a percent of the total, the new products are probably about 20% to 30% of the total quarter guidance. Again, these are partial quarter potential outcomes where we are not going to get a full quarter channel on either one of these, it looks like the AT&T product will have a few more weeks than where the Verizon product may even go to Q1, Again, that’s why I made the comments about the wide range of the guidance. So a lot of will depend upon how these go into channel and how the sell-through develops at the end of this quarter and whether we get the Verizon unit in Q4 and maybe the channels are whether we have to wait until Q1. Bryan Prohm – Cowen and Company, LLC: Okay. Thanks for that. And last question guys is, this data share plan that have been launched, have you seen any impact to sell through as a result of the 10 to 1 data share plans? I know there was something you would mention mid-year as a possible catalyst for device sales? Thanks.

Sure. We do think this is the catalyst. We don’t get that information directly as to what the activation rate plans are for our products. So if we read what you read that these are successful of the operators and certainly they should drive greater broadband device sales. But we don’t have the visibility into individually plans on that. Bryan Prohm – Cowen and Company, LLC: Okay, that’s something we’ll just have to watch then as these operators get around Q4 results. Thank you very much for your time.

Thank you.

Thank you, Bryan.

At this time, I would like to turn the conference back over to Peter Leparulo, Chairman and CEO for any closing remarks.

Thank you. And thanks everybody for your time and your attendance today, and we will look forward to updating you on our progress next quarter.

Please note that a replay of this conference is available one hour after the end of the conference call by dialing 1-877-344-7529 or 1-412-317-0088 and use conference number of 10018896, again conference number 10018896. The conference has ended. You may now disconnect your line.