Good afternoon and welcome to the Novatel Wireless Fourth Quarter and Fiscal Year 2014 Conference Call. All participants will be in listen-only mode. [Operator Instructions] With us today are Chief Executive Officer, Alex Mashinsky; President and Chief Operating Officer, Slim Souissi; and Chief Financial Officer, Mike Newman; and Director of Corporate Strategy and Investor Relations, Michael Sklansky. Please note, this event is being recorded. I would now like to turn the conference over to Michael Sklansky. Please go ahead.

Thanks Laura. During this call, non-GAAP financial measures will be discussed. A reconciliation to the most directly comparable GAAP financial measures is included in the earnings release, which is available on the Investor Section of the company's 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 on factors that could cause actual results to differ materially from expectations, please refer to the Risk Factors described in our Form 10-K, 10-Q and other SEC filings, which are available on our website. Now I would like to turn the call over to Mike Newman, Chief Financial Officer of Novatel Wireless.

Thanks Michael and thanks to everyone for joining us on this call on this very exciting day for Novatel Wireless. Today we announced that we met or exceeded all of our guidance metrics for the fourth quarter, returning to profitability and marking a critical first milestone in our new corporate trajectory. We have much higher ambitions than just profitability, so we still have a long road ahead of us to achieve all of our strategic objectives. So with each quarter of improved performance, we take significant strides towards our ultimate goals. Now for the details of our strong fourth quarter. Total revenue in the fourth quarter exceeded the high end of our guidance range, growing at 25% in Q4 compared to Q3, up to $55.4 million. As we anticipated fourth quarter growth was driven by revenue from our mobile computing products, which grew 35% in the fourth quarter to $47.0 million. The launch of MiFi 6620 with Verizon at the end of Q3 was certainly a major contributor to our fourth quarter success, but once again our results also reflected strong continued sales of our MiFi 5510. Revenue from our M2M products was $8.4 million in the fourth quarter as compared to $9.5 million in Q3, down approximately $1.1 million, but with solid gross margins as we continued our transition toward a better mix of high margin products. Non-GAAP gross margins remained strong across all areas of the business in the fourth quarter and neared the midpoint of our guidance range, relatively flat at 23.8% in Q4 compared with 23.9% in Q3. This stability in non-GAAP gross margin resulted in a 25% increase in gross profit in the fourth quarter compared to Q3. Non-GAAP gross margin for mobile computing products was 23.4% in Q4, compared to 23.1% in Q3 and…

Thanks Mike and thanks to everybody who is joining us on this call. Let me start by thanking all the nodes of employees. We have employees all over the world and who's done a phenomenal job or tremendous job in the last six months of basically turning around the company and the credit goes to them for all the hard work, both for efforts already achieved and our plans for 2015 and 2016. And I wanted to take this opportunity to share with you my vision and our focus for the -- for fiscal 2015 and 2016. Our goal is to be number one in IoT and know it’s hard for people on the phone to believe that Novatel can grow from last to first, but I think there is a great opportunity in front of us and this team is probably the best team out there to achieve these goals. As you know, I recently joined the company as an Interim CEO and after being here for several months, I really got to know other people, and got to see all energy in the company and I think this is the best team to execute on the vision and the strategy that we have for winning this category. Our plan is to grow faster than the competition and again lead the industry in innovation. So you can ask me so, how we're going to do that? And the answer comes down to two things, we have to be -- to achieve few successful M&As and we have to execute flawlessly on our organic growth. So let's talk little bit about M&A. We've looked at over 100 targets to date and we found several great companies that we are in discussion with and we hope to complete several transactions this…

Thank you. We will begin the question-and-answer session. [Operator Instructions] And our first question will come from Sid Sinha of Canaccord Genuity.

Great. Thanks, for taking my questions. And congratulations on the results and profitability, great job and quick turnaround with the business. Just a quick one on the M2M business to begin with, the sales have been soft in the second half of this year versus the first half and even your expectations for double-digit organic growth, it seems like there has to be pretty aggressive growth of these levels through the rest of this calendar year. So my question is I guess, what's driving the strong expectations, is it based on deals already won or do you need to win a portion of your pipeline for this to materialize?

Yeah I think jumping on that, we do have a great pipeline of orders and on many of these we’re waiting for our customers to either finish their testing or integration or deployment. Some of these are also category wins with major carriers that I think we announced before and we’re just deploying -- waiting for deployment. So we’re very confident with our numbers. And yes, I would have loved to see more sales in Q4, but I think you’re going to see all that coming in '15.

Okay, great and again for the mobile computing has been pretty solid growth expectations. Is this again just based on the deals already won? You're already working that carriers and have orders in place or is it something that needs to be -- you have to go out and win additional carriers for this to happen I guess?

Yes, most of our projections are based on stuff we already have in-house, all the things I talked about like this exciting new products that we’re going to launch in the second half and other things are all we’re budgeting that at zero right now.

But the deals themselves of course the sooner they are in the year, we got a higher percentage of them booked and the later they are in the year, we still have wanted to do it again but we've got -- we’ve got visibility into what we need to do to get that 20% growth.

Okay, great and then just staying on mobile computing, the business has been characterized by customer concentration with channel fills of these key customers driving strong seasonality in the business, giving your strong guidance and based on your current visibility, you think the seasonality could perhaps be less pronounced this year or do you think, you should expect that pretty strong back half of the year?

All right, there is always some seasonality in that side of the business, even when you look at our revenue guidance range for Q1 as compared to what we just did in Q4 and you see seasonality element of that. As we look across 2015, we expect it to be a little different than what we saw here in the back half of 2014. In the back half of 2014 our objective was to push the MiFi business mobile computing business to where we thought needed to be to establish that profitable foundation to then go pursue the IoT side, which we already have been working on to start longer sales cycles and we got a number of product initiatives. But from a seasonality standpoint, we would -- I would say we expect to see normal seasonality over the course of the year even while we’re pushing growth to the levels that we’re describing. It should be spread fairly evenly across the year.

Okay, thanks and then just one last for me and I’ll get back in the queue. Just on the 30% gross margin target existing calendar '15. I know based on your current gross margin levels for the two businesses, how should we think about getting to the 30% if the MiFi improves incrementally and then the bulk of the improvement comes from the M2M business, is that the right way to think about it?

Well when we talk about exiting the year at 30% remember that we were planning on pushing growth on the IoT side this year, double-digit organically as well as doing M&A activity. So as we get to the end of the year and we’re starting to close out the end of the year, IoT will represent a much more significant portion of our overall business. So in the end, it’s going to be a combination of strong margins on both sides, but IoT margins will be higher than mobile computing margins and -- but it won’t be -- it will be more evenly weighted as well.

Okay. Got you. And just if I can squeeze just one last one. I think Alex shared a metric about exiting the year at $400 million plus run rate if I heard correct that includes inorganic growth right or is it…

Yeah, it includes several acquisitions yes.

Okay. Thanks. I’ll get back in queue.

And the next question comes from Bryan Prohm of Cowen & Company.

Hey good afternoon. Congratulations on another good quarter gentlemen.

Thank you.

Hey, I’m just going to follow-up on a lot of the questions that have already been asked because there’s a lot of it is had been count out, so just following up on the revenue run rate exiting the year, at what point does mobile computing peak over the course of '15 on a quarterly basis as a percent of revenue? Is that something that's mid-year as intent ramps up by the time we get to year end it’s clearly decreasing as a percent of revenue?

So yeah I think that mobile computing as a percent of revenue is definitely going to be higher in the year and lower late in the year. As we -- once we start -- the M&A activity is going to be largely on that M2M side. And so it’s going to start diversifying our revenue stream away from mobile computing. So I think you should look at mobile computing revenues as being relatively steady over the course of the year, perhaps of the normal seasonality patter with IoT growing above normal seasonality patterns organically and then again inorganically as well.

All right, so it’s that run rate, great thanks for the clarification. On the 20% year-over-year growth target in mobile computing products, just sort of following on that, is most of that growth coming in the first half and that product that Alex alluded to, is that in the guidance or not? I’m sorry, I didn’t quite catch that part?

Okay. So there’s two questions there. The first question in terms of how the mobile computing growth gets spread over the year, obviously we just came off of a very good Q4 and particularly good on the mobile computing side in the fourth quarter. So I think you should look at growth in mobile computing as being more pronounced in the first three quarters of the year as compared to the fourth even with normal seasonality growth in the fourth quarter, because when you look at a products specific basis, that’s going to be tougher comp in Q4 of next year. In terms of the new products that Alex was talking about both early in the year and late in the year, they’re all included in our guidance. They are all -- we do sort of, I would say what you’re supposed to do, which is they’re included in our guidance and weighted in various ways. The near-term the product launch is, the more tangible it is, the more comfortable we are with revenue expectations for it. The later in the year, the more that can change between now and when you get there and we of course plan for that launch and we plan for revenues from it. Similarly we have all the cost baked into our plans over the course of the year as well. So I don’t think you shouldn’t read into the comments about new products as a whole lot of upside on top of what we said rather than things are sort of appropriately and reasonably baked into the guidance ranges that we give.

Understood, and I’m sorry Alex, pardon me.

Just wanted to add to that, so on the MiFi side, we now have several major carrier wins that we’ll be announcing in the next few months. And most of those are shipping towards end of the second quarter and into the third quarter. So that’s part of what -- what’s going to drive the growth on the MiFi side.

All right. That was one of my next questions. So that you've referred to a Tier 1 international operator that’s eminent, but it doesn’t sound like it’s in Q1 guidance based on when I just heard you guys say?

That’s correct. We would love to announce it but there we’re waiting for their launch. So the minute they launch, you will hear about it.

Understand. So it sounds like it’s a fairly long tail here with LTA with 50 carriers live around the world now on the 620 in. The renaissance of that product cycle or the product line mobile computing line up with this broadcast has been pretty interesting to watch that’s good work. Last question from me, how good is the transition in M2M from the 3G to 3G 4G chipset, is that essentially complete now and we should start to see that playing through the P&L from the results in Q1 with the revenue outlook and maybe the margin profile over the course of quarter through '15. Thanks.

Yeah this is Slim. So we’re in the middle of that transition. I expect it to be completed by mid Q3 end of Q3 and we continue shipping the previous generation chipset for most of our customers as we integrate the new chipset and getting the approvals -- the service approvals with those customers. So we expect to get those approvals by the end of this quarter possibly mid next quarter and then we’ll be in full shipment in Q3.

All right, great that’s all my questions. Thanks for taking my questions, thanks guys.

And our next question will come from Kevin Dede of H.C. Wainwright.

Good afternoon gentlemen. Let me add my congratulation on a nice job in the quarter gentlemen. Okay. First one for you Mike can you give us little detail on inventory? You mentioned some expectations for the MG1200 and if I have these product names correctly, the ASH21, and the MP36, what gives you the confidence that you'll sell through here?

So those are two different comments. One is you sort of generally alluded to the inventory and the other is our confidence in those products. The inventory, when we talk about building up inventory, we’re building up inventory into a portion where we expect the sales to be coming from. So obviously right now, a lot of the inventories that I talk about to meet customer demands to reduce shipping cost and those sorts of things are going to be on the mobile computing side as opposed to the M2M side with those specific products. In terms of what gives us confidence in those products, Alex you're probably better suited to answer that question than myself.

Yes, certainly Kevin, thank you for the question. So most of these products, the ones you mentioned are replacement project, next generation products for existing products with existing customers and new customers. So we’re in the middle of integrating those products in our customer services platform. Some of them had started shipping. Some are still going through the integration process. So we expect them to be a continuation of an existing business from legacy products and also new business one with new customers.

Kevin, so just to add to this, again everything we're doing in-house is positioned to make us number one IoT. So number one in IoT means that we ship faster than anyone else, we've the best warranty than anyone else. It means that we have the lowest failure rate than anything else and I think we’re already there with several categories, but we’re improving on every aspect of every product that we make. And to get there, we had to make tremendous amount of internal changes and processes and manufacturing and inventory and everything else. To be able to deliver amazing experiences to our customers and you start seeing that in our ability to scale and our ability to execute and outperform all of our competitors.

Okay. Mike, thanks for the extra detail on and you too Alex for the -- on the MiFi product and the additional carrier wins and that’s always been a big question for Novatel right because there has been sales, strong sales growth in mobile computing when your large national carrier ramps up with a new product cycle and then obviously just tends to fall away. So I guess basically what I've heard so far is that based on wins that you have, you’re building inventory in anticipation shipping to customers that you won in mobile computing and that’s the basis for what you said Mike on seeing pretty good comp on year-over-year in mobile computing for the first three quarters and then obviously more difficult one in the fourth quarter, is that the best way to look at it?

Yeah, that was well put. When we look at the build up of the inventory, it's not something that we perceive as something that we stand great risk of getting stuck with or anything like that, this is inventory that we see the sell through. We know it's there. It's really just a matter of optimizing how we handle supply and operations.

Let me add to that. I think its in the first half of, I’d say for the last three years in the first half of '14, the company was in shrinking mode and we actually pull out distribution and relationship with different MVNOs and other customers because of our idea of reasons. We’re now in growth mode. So we're signing up new accounts. We’re opening new distribution channels and that includes as we mentioned on the last call in Europe and Middle East and South America and other places. So a lot of this is additional distribution, additional skews that go into new markets and new partners that we’ve not worked with either in years or ever before. And again, you can go through the last dozen announcements that we've made. You’ll see a lot of great names in there and you’ll see one or two weeks coming out of the Novatel and I bet you're going to be surprised at some of the names you see there.

Well, there is on that I hope you, you can address little later in my next question or question after this one. Just drilling in on mobile computing at least through the fourth quarter and what you’re seeing so far this year, can you talk to the order trends? Can you give us an indication of this strength of demand at least in North America for the 6620 and where you think it can go?

Well, again I think you're viewing it as a cycle that one product dies and the second product takes off and then it dies and then next product takes off and that’s how -- that’s the history of Novatel. The future of Novatel is that when a carrier or anyone else moves from one product to the next, we continued to sell the other product, the older product in this case that 5510 for example is selling extremely well in new channels. We’re opening new channels for the 5510 every week. So what you’re seeing now is increments of one product building on top of another product and we’re adding skews and we're adding certifications and we're adding new markets right. And as the borrowing on all these products get cheaper and cheaper, we actually get to enter with the same product into new markets that we couldn’t do before. So we also have more slots. I mentioned on our last quarterly call, we have more slots now with our top customers than ever before and we haven’t even started shipping all those slots. So as we start shipping all the slots, you have more diversification inside each customer not just diversification of customers.

Great, okay. On the -- it was pretty clear that one of your recent announcements, I think early February you said product that looks to me it's going to end up at a major I guess distribution for a major beer company and I was just wondering if you could shed, share any more detail on how you see that evolving? How you won that and what else it might lead to and I think that was through Sprint.

So, we have direct products and we have wins, where we are either the module or the reference design or a box inside a solution and in this case, I think we are module inside the solution. We’re not selling the entire solution that different vars that actually deliver the solution to this for that customer. So the point there was more to indicate that we continue to win reference designs and module designs with different customers then to tell you that, that specific customer is going to change our balance sheet or is going to grow revenues by 20% plus right. And the biggest drivers right now of our business are till our core products that we make for the major carriers right and we’re now supplementing it with many other things. Whether it's going to take a year or two before all of these other products kind of pass the 50% mark as Mike indicated before and we need several acquisitions to help us get there. The key message here is where we plan to exit '15 and go into '16 with a broader set of products that anyone has in IoT and I hear a lot of messages, a lot of questions from the different analysts, but everyone is just focused on the next quarter. I think you have to put in perspective our strategy and our ability to execute on the strategy while keeping the company profitable and I think that’s the key message out of this call is if we can execute on that, then everyone else that you’re looking at who you think is a leader in this industry, you have to measure how we’re performing against them and that’s what we do every day and frankly I think we have a much better vision and much better strategy.

Okay, fair Alex. Thank you for the additional color. I guess I’m still little curious about the retention bonus, you seem to make it clear that it was for 4Q and for 1Q going forward, is there anything planned beyond that?

No, this was a onetime retention bonus plan that Alex put in place, very shortly after he joined the company to keep the people here, who are now executing against the planned addition so effectively, So it's worked, but there won't -- other than this plan, which was to keep people in their seats after what was going on in the first half of the year we’ll have our normal compensation programs going forward. This is a onetime thing.

Okay. Fair enough. It seems to me too, it seem to be directed more toward your R&D people, is that true.

Its spread evenly -- well, it's spread evenly throughout the company on sort of a per employee basis, but when you look at our headcount in different areas, it is the case that little over $3 million of that $5.5 million is directed over R&D.

Okay. Yes, I am sorry. Okay. That's enough. I don't really need to hear anymore on that. That's a general trend. I am more curious about how -- I know it's important and certainly competitive differentiator given the close work that you've done with Qualcomm. I am just kind of curious when you -- given some of the products you talked about today and your overall strategy, how do you see the mobile computing product refresh cycle evolving?

So first let me say that Qualcomm is probably one of our best partners. It's like a continuous flow of oxygen and we're surrounded by Qualcomm building. So we're very lucky to be positioned and be such a close partner of Qualcomm and have early access to both product and software and opportunities that Qualcomm has. As you know, they're doubling down on IoT now, they're refocusing on that and we hope to leverage that and leverage our relationship to help us position Novatel as the key solution provider with Qualcomm. We are planning to issue products with their CAP9 solutions. We plan to add other solutions and integrate their snapdragon and other families of products. So basically offer a variety of solution around the different families of products that Qualcomm has and I can't say enough good things about Qualcomm.

Great, okay. Thank you for the color gentlemen and thanks for taking the questions. Congrats again and nice job.

Thanks Kevin.

[Operator Instructions] Our next question will come from Cobb Sadler of Catamount Advisors.

Hey thanks guys for taking the question and allow me to follow on with congrats on the turnaround. I've been watching the space for 15 years and that's a tough scene that happened, so congrats there on the split. Can you give us a rough split on the 5510 versus the 6620 in the quarter? Are you guys breaking that out?

No, we don't break that out. As you think about it, the trends assuming we're successful in what we're doing is we're keeping the 5510 as long -- alive as long as we can, but the 6620 is the future of our product in the product space.

Okay. Got it. And then the international market, so U.S. is obviously more developed and developed more quickly for LTEs and in the rest of the world, do you got a lot of carriers, 50 plus carriers with LTE capability now. How is that market shaping up because traditionally for the company, one thing or another, they didn't really pursue the international market? So how is that shaping up? Who shows up? Is the pricing tough? Are you talking more about undeveloped markets like India, just a little color there?

Clearly, I think you have to look at the MiFi family as more than just the hotspot right. There is MiFi car and MiFi home and we've a variety of products that are either already shaped or being put together that address different markets that have unique engineering challenges and if it's a coverage issue, or it's a pricing issue, or it's a data plan issue. So we're working with partners all over the world to solve specific issues that address specific markets and how do you solve a roaming issue for a car that drives over four or five borders in Europe every day, right? So things like that, that no one has solved yet. So we're excited about a lot of these opportunities. We think we're the front edge of both the technology, the solutions that we have, the ability to go and know on the door here at Qualcomm and ask them for far more change or anything else we need and be able to deliver these things to market faster and with a better engineering solution than anyone else. So we don't necessarily compete on the plain Vanilla MiFi. Even though the winning -- we're winning very well there, but what we're trying to say here is that most of our new wins are adding to our gross margin and they're adding to our growth and you can only achieve that by selling higher value solutions to more and more customers.

Okay. Got it. I look forward to hearing about the product in the second half and I am assuming that's more -- that's an M2M type of product or excuse me, a MiFi type of product or is an Indian product for the second half?

Well, it's a great question. The way we define IoT, IoT covers both what we call the MiFi home and the MiFi car as well as all the industrial application, the telemetry, the telematics, the security stuff. So again I don't see the clear separation between what you call mobile computing and our IoT or M2M products. We see everything falling under one IoT umbrella with many of the same customers using products from both sides.

Okay. Got it. And the double-digit IoT growth, what -- it sounds like you're spread across most of the verticals or like to say couple of the top verticals that you are going to apply to growth that rate, the UBI, where are you -- where are the deals that you won that are going to allow you to put up double -- I mean slightly north of 10% or maybe even mid double-digit growth?

Most of the IoT growth actually is spread across the verticals we address. UBI is definitely one of the major verticals we have. There are multiple launches happening either this quarter of next quarter as we finish the integration of the MT 3060 into the service platform of the UBI companies. We also -- Mike touched on the MT 1200, which has several customers going through integration and that one also will have double-digit growth, plus the SA 2100, which is one of the leading products into telemetry and the connected car market. So I would say these three major products all will see growth that's consistent with our expectation for this year.

Okay. Great. Good to hear and then, the last question is on the patent scenario, the patent outlook, I guess you had a Markman hearing not too long ago, any clarity there or is it still TBD or how do you feel about that?

So I believe you're speaking to the litigation with Franklin and GTE and we feel very good about that. The Markman hearing from our perspective was a very successful outcome. These things are -- you read the rulings and they're very complex, but the assessments from the way we wanted them to be, at this point we're, the way we're proceeding with the litigation is reflected in our spend, is they were proceeding with the litigation in a fashion where we're keeping it and keeping off of our operating expenses. We've signed the patent and the case to somebody who is proceeding with it in sort of -- we'll get our share of the proceeds, but that allows us to get the upside of the litigation without the ongoing expense management, but overall we feel very good about that litigation.

That's good to hear and then I had one more question, still on the -- to growing the IoT business and obviously you mentioned that you're going to be doing some deals and can you talk about -- will those deals be first half weighted or second half weighted, do you know -- do you have some in the bag or do you have just a big pool where you feel confident in several and you just kind of wait and pick the best lot I guess.

So on those transactions we do have our toe in a lot of ponds right now. I don't anticipate -- you shouldn’t anticipate that they're more weighted frankly in any particular part of the year. It's a strategy that we're embarking on over the course of the year and we do anticipate multiple M&A and when they come in and the size and shape of each one might vary. But we're not looking at font end weighted and backend weighted. It's going to be sort of a constant effort on our part throughout the year.

Sounds good. Well great job and thanks very much.

Thanks.

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