Novatel Enhances USB Product Line - Analyst Blog

Novatel Wireless Inc. (NVTL) has launched an innovative USB modem for Dual-Carrier HSPA+ networks. This is in alignment with the company’s initiative to introduce wireless broadband access devices suitable for high-speed net-generation mobile technologies. Recently, Spanish telecom giant Telefonica S.A. (TEF) introduced Novatel’s Ovation MC545 USB modem for its dual-carrier HSPA+ network, which was designed and installed by L.M. Ericsson AB (ERIC).

Ovation MC545 theoretically supports a downlink speed of 42 Mbps and an uplink speed of 5.7 Mbps. This device supports the 900, 1900, and 2100 MHz frequency bands and is designed to provide connectivity anywhere within an operator’s network. Another advantage of Ovation MC545 is that it is the industry’s smallest dual-carrier HSPA+ modem.

Novatel is facing intensifying competition for its legacy embedded solutions products. Loss of market share in the embedded solutions market resulted in lower ASP that in turn reduced the second quarter 2010 gross margin to 18.9% compared to 22.1% in the year-ago quarter. Novatel forecasted 20% gross margin for the third quarter 2010, well below its traditional 28% range.

Although Novatel has developed a niche for its MiFi mobile intelligent hot spot, we foresee increased competition from the latest version of smartphones with in-built WiFi capabilities. In the second quarter 2010, MiFi sales declined by a whopping 26% sequentially. Nevertheless, the company has decided to launch MiFi OS with five tier 1 wireless operators in fourth quarter 2010. This will enable software developers to use MiFi’s open CGI to access the on-board processing capabilities of this intelligent mobile hotspot.

The market for broadband wireless access solution is emerging rapidly in terms of technological innovation and demand. Novatel’s product sales depend to a large degree on the market dynamics for wireless access to enterprise networks and the Internet and may be impacted by alternative solutions. Many of the company’s competitors like Sierra Wireless Inc. (SWIR), have greater financial, technical and marketing capabilities which may enable them to respond more effectively to emerging technologies and changes in customer requirements.

We maintain our long-term Underperform recommendation for Novatel. Currently it is a Zacks #4 Rank (Sell) stock.