Good afternoon and welcome to the Novatel Third Quarter 2015 Financial Results 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]. Today on the call, we have with us Sue Swanson, Chief Executive Officer, Michael Newman, Chief Financial Officer; and Michael Sklansky, Head of Investor Relations. Please note that today’s call is being recorded. I would now like to turn the conference over to Mr. Michael Sklansky, Head of Investor Relations. Please go ahead.

Thank you, operator. We would like to remind all listeners that 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 Investors 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 of 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. I would now like to turn the call over to Sue Swenson, Chief Executive Officer.

Good afternoon, everyone. I really want to thank all of you who have joined us today. And I very much look forward to sharing with you our plans for Novatel Wireless. I am very pleased that the Novatel Board has given me the opportunity to guide Novatel Wireless as we focus our execution on the Telematic verticals of IoT to drive shareholder value. Alex Mashinsky led the first phase of the company’s transformation from a MiFi business to an IoT telematics vertical business. What I plan to do is complete this transformation by integration our recent acquisitions, bringing some discipline and focus to our product development efforts and driving increased revenues in highly profitable IoT software and services. Having been involved with Novatel for the past three and half years and working closely and very collaboratively with the senior management team over the past few months on operations and integrations, I can say with confidence that after years of struggle and attempts at reinvention, Novatel finally has the human capital, the asset base and the clarity of vision to effectively compete in a growing market that holds a lot of opportunity. The acquisitions of Feeney and DigiCore have truly changed the game for Novatel. These are companies with decades and I mean, decades of experience in IoT and Telematics, talented management teams and very competitive products that span fleet segments from the entry-level all the way to enterprise. The list of customers who are using DigiCore’s Ctrack SaaS platform and products is really impressive, and includes companies such as Mercedes Benz, KLM and Coca-Cola. As a result of these strategic and successful acquisitions, the fabric of our corporate strategy has dramatically shifted. At this time, we no longer need to look to acquire more new assets to shape our destiny.…

Thanks Sue, and thanks everyone for joining us on this call. Today we announce results that were consistent with our Q3 expectations that we updated just last week. Overall we were pleased with our performance in the third quarter given the significant distractions associated with our transformational events of the past six months. Two acquisitions that doubled and then redoubled our IoT revenues along with improving our cost structure with significant expense rationalization activities that reduced our annualized operating expenses by $10 million. To put our corporate transformation toward the Internet of Things and perspective, in the first quarter of this year 2015, our IoT revenues accounted for just 17% of our total sales. Just six months later, in the third quarter, our IoT revenues comprised 32% of our total sales. And now, with DigiCore added to the company’s portfolio, in the fourth quarter we expect our IoT revenues to be approximately half of total revenue with two thirds of DigiCore’s revenue being recurring revenue under multiyear contracts. For the first time Novatel can truly call itself an Internet of Things Company, emerging from this transitional phase with a clear vision and strategy and how to organically increase IoT market share and generate shareholder value. Now that we’ve established a comprehensive set of IoT offerings with Novatel, FW and DigiCore, going forward our focus will squarely be on increasing our higher margin, recurring SaaS and services revenues. These revenues are the linchpin to Novatel’s future more so than hardware revenues because SaaS and services generate significantly higher margins and very importantly are much stickier because of their recurring nature. As Sue mentioned, starting in Q4, we will be breaking out our hardware revenues from our SaaS and services revenues, so you can track our performance against this very important business…

[Operator Instructions]. The first question comes today from Cobb Sadler with Catamount.

Hi, thanks guys for taking the question. And congrats for taking the baton and congrats on making decision to focus the company on IoT. So, just in listening to the prepared remarks, I mean, the IoT business is growing, it’s profitable, it seems like a much more predictable business. And then I look at the Hotspot business and that business is, can you hear me?

Yes, we can, go ahead.

Okay, great. Yes, that business is not particularly predictable, it’s you’ve done the best you can whether it’s profitable but it’s always been swung from profitability to losses, I don’t know, it’s hard to forecast. I mean, at some point, given that you have critical mass in IoT, you’re well positioned. And that kind of seem to be the future of the company. Would you consider getting out of the Hotspot business or strategic partnership or something just reduce your dependence on that company. And I look at the concept there, some of the comps and the business that you have the IoT SaaS businesses. Look it’s not value particularly high versus the comps. So, would you want to spin-off or sell the Hotspot business I guess is my question. Thanks a lot.

Okay, thanks. But before I answer the question, I just wanted to mention to everybody listening that we posted a short presentation on our website, it’s under www.novatel.com under the section Investors. The corporate presentation that we posted today and we wanted to put that up there to help people understand why we’re so excited about our future, and our future and competitiveness in the IoT and Telematic space. There is, a couple of pieces of key information there about the segments that we’re involved in, the breadth of our solution, the opportunities for growth. And let me just point you to page 4, which I think is why we’re so excited here as when you compare us to a leading Telematics provider. And you look at some of the key high-level measures. I think you can see why we’re so excited about DigiCore. DigiCore was an unknown name being a South African company. And we’re not going to have to start from ground zero. So, if you have a chance, take a look at that. It just got posted I think just a little while ago. So, Cobb, sorry for that long introduction, but I wanted to make sure that callers were aware of that.

Sure.

Onto your question, we absolutely agree with you. I mean the MiFi business which is obviously why we are doing what we’re doing is sort of all the reasons you stated. As I said in my opening remarks, it’s a cash flow positive business but unpredictable. It does still provide purchasing power to the IoT side of the business due to component synergies so it does have some advantage there. It also does foster a very important relationship with two of our most important players in IoT and that’s Verizon and Qualcomm. Having said that, we believe very strongly that there are several underlying market trends that are happening today that have made this asset particularly attractive to large companies in a few specific verticals. So, I can just say that that’s I think a good situation for us right now. And we would certainly be willing to entertain any compelling offer for this business.

Got it. And again, like you said, it’s a profitable business, the growth of this, and I look at the market share estimates and if you believe the entry analyst, it’s a 30% growth global business. And I guess it probably takes the right amount of skill and ability to invest to kind of tap the global market. So, it seems like it could be a nice little asset for someone who have the interest and also have the capital. Just moving on to DigiCore, Richardson Texas, it sounds like you’re going to close some operations there. One of your competitors which is pretty heavy focused on North America and talked about your growth strategy being moving outside of North America which seems kind of hard, kind of a tall order. And I guess that the question there is, would you guys, since you don’t have a whole lot of business in North America, you are based here, would you - I mean, are you pulling out of the North American market by closing Richardson or are you just refocusing and going to kind of tackle it on a broader scale within North America. Because it seems like one player kind of dominates the North American market and it’s probably routing for a second sourcing, and you’re growing from a small base. And internationally it sounds like you’ve done extremely well and continue to. But I was just going to get your thoughts on what you might think, what your strategy would be for North America. Thanks a lot. And that will be it, thanks.

Okay.

Thanks Cobb, this is Mike Newman. So, the closure of the Richardson office is more related to our combination with DigiCore and some redundancy created between the Richardson facility and our DigiCore South African based operations. It does not at all signal or move outside of North America, in fact DigiCore Ctrack product is currently are now launched in the U.S. And that’s an area of opportunity for us. But frankly, it has more to do with synergies and has more to do with our appreciation for the lower cost structure and low cost talent that is available to us in our South African operations now based on the foreign exchange rate between the Rand and the U.S. Dollar. So, we’re just taking advantage of costs and synergies there.

And Cobb, let me just add little comment to Richardson, just particularly around cost structure and synergies just to add to Mike’s comment. Cobb, the overall cost structure of course has been the focus for a while. Obviously, it continues to be end-to-end, so that’s just one indication of some of the things that we’ve looked at and are making decisions around. Certainly the focus that I have at least initially is around these cost structure opportunities and efficiency opportunities particularly combining these companies. That’s kind of one area just overall cost structure. But on synergies, I really see that as two pronged and one is obviously the cost structure. And we’re looking at what are the large opportunities from a synergy perspective. We’re still investigating that that we think there are things that can be done. But we haven’t made any final decisions on that. I think the more important synergy right now between the companies is really around revenue. There opportunity is already that the companies have realized, for example Feeney, really can go into some of the accounts that DigiCore, those brand names that you hear and can provide some professional services, systems integration and capability that DigiCore I think can take advantage of. So, cost is obviously very important, we’ll continue to focus on that. But I think that more important are the revenue synergies and I’m going to be spending quite a bit of time on that.

Thank you. Our next question comes from Kevin Dede with Rodman.

Good afternoon. Thank you so much Sue and Mike for all the detail that you’ve offered. I was wondering if you wouldn’t mind just thinking a little bit deeper on the tactical implementation of what appears to be a focused Telematic strategy. And just give us a little insight on sort of the top-down view of whether or not you intend to sort of centralize operations or not. I mean, my understanding was that DigiCore’s CEO, returned from retirement to right-size his company and done that, obviously. And I’m curious as how you see some of the senior executives I guess playing together in developing all the assets that you had collected at this point?

Thank you, Kevin. I mean, that’s an excellent question. I think I made comments in my opening remarks about the fact that I really have joined an exceptionally talented team. I think the structure today is working. We have some very specific things that the leaders are working on. I think things will evolve from that perspective. But right now as we’re working through the strategy and we’re working through the decisions around the global opportunities, I don’t think we want to make any other changes immediately. This team is working pretty well together right now. And there is more work to be done than honestly we have people to do it. Nick Vlok is an experienced pioneer frankly in the Telematic space. He’s been in the business for 30 years. And he brings critical I think knowledge and expertise to the combined companies. Nick and I talked quite a bit. And I’m learning quite a bit from him. So, I don’t think there is any significant overhead at this point relative to what we’re trying to do. And I think just like any leadership structure those will evolve particularly as we make decisions around what we do regarding our expansion in. As you see in the corporate presentation, there is, lots of opportunities, it’s going to be a decision of what’s the best opportunity to take. So, I’m pretty happy with the way things are right now actually.

Okay. So, you mentioned revenue synergies and source synergies from Novatel and perhaps integrating FW capabilities into the customer relationships that you have on the DigiCore side. I guess, what I’m wondering is, how do you plan to package that and deliver it from a marketing perspective?

It’s a great question Kevin. I think that’s one of the things that the team is actually working on right now, because as any kind of combination of companies, you have to make some decisions about go-to-market, branding, all of that. These are things that the team is actually talking about right now and really trying to decide what’s, the best way to position. There is, various ways that you can go-to-market. And we want to make sure that the brand equity that the companies have is used appropriately. So, we haven’t made any final decisions on that yet but certainly the conversation is taking place. And we want to do it right. One of the things I’ve learned through the years and particularly on my years being involved with other companies on their Board is sometimes I think people rush to do integration things and make mistakes. What I’ve seen in the most successful companies is that they’re thoughtful, think of true and obviously focused on the current business. But I think we need to think through this very carefully. I’ve only been on the job for a week. So obviously we got some work to do here. But those conversations are taking place. And I think you’ll see us come out with a strategy that will make sense for the entire company so that we can go-to-market with a very effective brand and compete very effectively with the market leaders. And frankly, DigiCore is a market-leader in many of the markets that it’s in. So, I think we have to be very thoughtful about branding go-to-market. So, no answer at this particular point in time but it’s certainly a topic of considerable discussion.

Well, I appreciate your reflection on that. I think that may have been one of the steps that Novatel trips on in its initial acquisition as in for trying to push the company into the M2M space. All right, just a couple of housekeeping questions and then I’ll drop to back in the queue. I’m wondering Mike, what you think your DNA number will be in the current quarter, depreciation and amortization just for a cash flow perspective or GAAP?

Okay, yes, I thought you said G&A, so it threw me off. The depreciation and amortization, it’s going to pick up with the addition of DigiCore. So, this is going to be sort of a complex thing going forward as you’ll get your arms around it. But I’d say somewhere in the $2 million to $2.5 million range.

Okay, fair enough. I know that, that was a tough one to try to weed through and looking at IFRS. All right, where do you think your sales level has to go to breakeven at the EPS line based on your projected financial model?

Yes, so, Kevin, that is, it’s an interesting question because it actually leads into sort of various streams of answers. Because we no longer, back when we sold Mobile Computing Products at a 27% margin, and IoT hardware products in a 29% margin, I could tell you, we need revenues to get to x level. But that’s different now. Now that we’ve got SaaS and services solutions that we think are going to be in that 68% to 71% gross margin range or just at a minimum, call it 65% plus going forward. It’s no longer a matter of growing the overall revenue base to a certain point. It’s more a function of growing the proper revenues and getting the right proportion in revenues to get back to sustained profitability. And so, obviously we’re guiding to positive EBITDA, adjusted EBITDA on the fourth quarter, but as you noted there are still obviously a few line items below EBITDA that we got to conquer. But I would expect us to continue to grow EBITDA and grow our income line over the course of next year. We’re, as Sue mentioned, we don’t really want to give long-term guidance at this point but I would expect to see that continue to grow over the course of the year. And like I said, I would encourage you to start thinking about our business from hardware standpoint. And we both mentioned this earlier, think about our business from a hardware standpoint and from a SaaS standpoint.

Software and services, yes, right. I think that’s a great message. And I look forward to seeing your results translated that way. And thank you for making that point Mike.

Okay.

Could you just give me the rough headcount at the end of the September quarter whether or not you think its stable and what we should look for at the end of the year?

Okay. While at the end of the September quarter, we had not yet acquired our 1,000 DigiCore employees. So, but it was, about 400. And so, we’re looking at about 1,400 with DigiCore. And again, we are evaluating where we sit in different markets and different elements of the operation. So, it’s tough for me to peg a specific headcount target. Like I said, operating expenses should be in the $26 million to $28 million range. And sort of regardless of where that headcount number goes. We do have a lot of shifting that we can do at this point between lower cost development locations like South Africa and Eugene as compared to higher cost locations like San Diego. So, it’s a bit of that just going on as well.

Okay. Well, thanks for that detail Mike. And Sue, I want you to know, I’m very much looking forward to some strict operational discipline and your focus on execution. So it’s something that company certainly could look forward to see in the results of. And I wanted to thank you for providing all the detail that you did in the call so far today.

Well, I appreciate your question Kevin. And I too look forward to it. It’s something like I said I really enjoy doing and having been involved in a couple of companies that needed this kind of focus is something that I’m quite comfortable with. And the team here is great and very excited about doing this focus as well. So, I think we’re off to a good start here.

Great. Thanks very much.

Sure.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Actually operator, I think there may be some more questions in line.

Okay, sure. Our next question will come from Michael Tanzer with DG Capital.

Hi guys, nice to hear from you Sue on the call. I just have one specific question and one sort of more general question.

Okay.

So, I respect your view on sort of throwing your annual guidance. And I know you just stepped into the CEO role. But I think that you were at least somewhat involved in the DigiCore acquisition and you mentioned that you were speaking to Nick Vlok on a semi-regular basis. And from my impression, one of the merits of the DigiCore acquisition was as you mentioned before on the cost side. Could you just spend a minute or two walking us through, even a wide range of quantified guidance on that cost side? And maybe like specific for example, procurement or headcount or anything that you could give me on that?

Yes, Michael, thanks for the question. Actually I think the conversations with Nick have probably been more about some of the strategic issues versus the detail. Last week we were obviously having a board meeting and making some transition changes. And then obviously, we’re getting prepared for the call today. So, unfortunately today I can’t give you any specifics around that. But we’re beginning to do the work to find out where those bigger opportunities are. And the teams that’s actually at Novatel and DigiCore and Feeney, like I mentioned Dave Dohna for example on Supply Chain and Manufacturing, talking to the folks in South Africa, really trying to size where the opportunities are Michael. But we haven’t made any final decisions on that yet. So, it would be very premature for me to even speculate today on what those might be. But I can just assure you that the teams that are in the functional areas are working very closely together to identify what those opportunities might be.

Understood. And then, my final question is sort of a two-parter. And one is, on DigiCore, in the acquisition presentation/road show, it was mentioned that DigiCore could provide an interesting platform to penetrate the attractive U.S. market. Is that in the cards still or is that a wait-n-see? And then finally, with respect to the competitors in the U.S. market the guy who asked the first question mentioned this. But the competitors trade at really very rich valuations. So specifically what’s the plan to close that valuation gap?

I really appreciate the question. In terms of the regions, I’ll point you again to the presentation that we put on the website. There are several target regions for growth with the U.S. being one of them obviously. If you look at the CAGR in the U.S., it’s about 25%, if you look at South America, it’s 30%. DigiCore is already in some areas that are somewhat more developed. But the U.S. is certainly a target. So, we’re actually taking a look at what those opportunities would be. And I appreciate you bringing up the difference in the valuation. On Page 4, if you look at the kind of the key metrics of DigiCore and Feeney and Novatel together compared to a leading competitor in the U.S., you can see that that valuation is significantly different. And we think that now that people in the U.S. have better visibility to DigiCore and you know it was a public company in South Africa, but didn’t have much visibility in the U.S. I think there will be a much better appreciation for the assets and the competitive portfolio that this company brings to Novatel. So, my expectation would be that we would see some improvement in the valuation of Novatel at some point as people start to learn about the business. So, again, I think, part of it is getting the information out. We couldn’t talk about DigiCore really until today in any great detail. And obviously as time goes on and we have more information, like we said, we want to share with you the comparative metrics because those are things that you can judge our success by. So, hopefully you can take a look at that Page 4 and just see that, there is a real opportunity for this company to significantly improve its valuation. So I really appreciate the question you pointing that out.

Okay. And just a follow-up actually to the long-term target. Again, so, obviously this wasn’t your management team but Mashinsky gave this sort of wide range on the guidance of $25 million to $40 million for 2016. And I want just to know in broad qualitative terms, what if anything has changed since then in terms of the, you building on those targets?

So, it’s a good question Michael. I mean, nothing has really changed other than the fact that we’re looking at evaluating the various elements of business. We’re, like I mentioned to on an earlier question, sort of we’re less, we’re focused on revenue growth but we’re less focused on total revenue growth of the company. And what we really want to do, it’s your point about improving the value of the business and the value of the shareholders. What we want to do is make sure that we’re driving the right areas of the business with not only the greatest short-term profitability but the greatest long-term profitability, our potential as well. And so, with Sue coming on, one of the things that we wanted to do is just kind of not hold ourselves to a certain roadmap for strategy we had before that was intended to deliver a specific number in a specific timeframe by 2016. But rather to deliver increasing value overall by driving the right revenues with the right gross margins and the right EBITDA margins as we go forward. Sue?

Yes, I mean, I agree with Mike. I mean, that’s really the focus. And clearly some things have changed in terms of the assumptions that were made particularly around the MiFi business. I mentioned in my comments that there was I think some assumptions and some hope that some initiatives in the consumer space would get traction. And there was a lot of time and effort and resources spent on that. And unfortunately those ideas never came to fruition. And it became very clear to us that we needed to basically reallocate those resources into something that would actually create long-term value. So, I think that is something that started a while ago and we will continue that. But those assumptions I think, at that particular point in time, some of those initiatives would come to fruition in a big way. And it’s pretty clear that that MiFi business is mentioned earlier on the call. It’s just not that kind of business anymore. This acquisition has truly transformed us into a recurring revenue growing business, SaaS business that has customers for the long-term, customers commit to you over time for a long time and you’re not trying to close every quarter on the latest hardware that, I mean, being in the hardware business only these days is not a very good business to be in. So I think that were some of the assumptions that probably led to Alex making those predictions.

Okay, understood. Well, thank you for taking my questions.

Certainly, thank you.

The next question comes from Ned Shadek with Pioneer.

Hi Sue, can you hear me?

I sure can, hi Ned, how are you?

Sue, congratulations on your new job. It’s nice to see a native San Diegan there at the helm, so. So we wish you well. I had a question and a couple of comments. My question is, can you talk a little bit about your pay package. I’m curious as to how you decided and how you and the Board decided that maybe you can explain your, thought behind it?

Sure. You want me to make that and then you’ll come back with comments?

Yes, if you don’t mind, yes.

Okay, sure, sure. Well, Ned, you and I have talked for quite some time. And I think it’s really important that I leave no ambiguity about the fact that I am incredibly aligned with the shareholders of this company. And I think there has been some frustration and some concerns about just some of the packages perhaps have occurred in the past. And I didn’t want to leave any doubt that, I don’t want to win unless the shareholders win. And so, I hope that everybody who read the 8-K and understands the detail of that, understands it, that’s the model that I think is important particularly at this point in time in the company. And I think it’s really important that that occur.

And this is Mike. Just for those of you who may not have read the 8-K, what Sue was talking about is her annual salary will be $1. I’ll break that up into 24 separate checks twice a month. And but also stock options, her entire compensation package would be in the form of stock options with your sort of standard one-year clip and four-year vesting price at the market price. And so that’s the specifics about what she said.

Yes, thank you. So, hopefully that sends a pretty strong message that my interests are aligned very closely with the shareholders of this company.

Yes, and again as the shareholder, I was happy to see that. I just had a couple of comments. There has been a lot of talk on how we’re shifting towards the IoT business, and a lot of talk about how compared to some other companies we may look cheap and there has been some talk about how do we close that gap? I have a couple of suggestions. I think there are a couple of different things you could do to close the gap. I think talk is cheap, I think putting numbers on the board and actually showing the revenue and margin and cash flow capability of the new company is the best way you can do. Just put numbers on the board and show us what you could do.

All right.

I think close behind that is I do think and again you’ve mentioned that and we’ve a lot about it on this call, there is no doubt that the MiFi business, the Hotspot business is not liked by most investors. And as long as you have it, even if we look after the fourth quarter, it’s still 50% of our business. So, if there is an opportunity to get out of that business and a way that we think is fair and equitable. Overnight we transform ourselves into a 100% IoT business, I think that’s another path to consider. And then, I think the third thing you could do is clearly, FleetMatics has got a tremendous valuation. If there is any way that we can take Digi and its products into the United States, and actually compete with those guys. If that was the day you wake up and, we took the business from FleetMatics, then all of a sudden, I think that’s a game changer. So, just a couple of suggestions from a long-term shareholder.

Well, Ned, I agree with you more. I think closing the gap and putting numbers on the board is what I’m used to. I told people here that I come from a long line of competitive sports. And I never did it just to play the sport, I did it to win. So, I think people who route with me and my competitive nature. And it means that results-focused and getting those results. So, I can assure that I’m very committed to that. I’ve also mentioned our view of the MiFi business. So, I think like we said, we think it has, it’s an asset that is looking more and more attractive. And we would seriously entertain an offer that made sense for the business. And in terms of entering the U.S. I can assure you, we’re looking at it very closely. And in terms of the competitor there, I view competition as a good thing. To me, it’s a motivator to have a strong competitor. And it gives the, the current underdog an opportunity, as you know that happens in sports all the time, the underdog gone through the, for the person who has the lead position. And I think that creates a really compelling focus for the organization. So, we’re kind of excited about actually kind of going head-to-head. And FleetMatics has created, I mean, frankly, they’ve done a terrific job. They’ve created market awareness. And just like in cycling, you sometimes you draft and you take advantage of that. So, it’s going to be fun there Ned, it’s going to be really, really fun to do this. So thanks for your comments. Really appreciate it.

Ladies and gentlemen this concludes our question-and-answer session. And thus concludes today’s call. We thank you very much for attending. Take care. You may disconnect at this time.