Yesterday, after market close, Novatel Wireless Inc. (NVTL) declared its financial results for the fourth quarter of 2010, which fell below the Zacks Consensus Estimates. More importantly, Novatel provided a devastating first-quarter 2011 financial outlook. Therefore, in the after-market trade on NASDAQ, stock price of Novatel was down by a whopping 86 cents (12.76%) to $5.88.
On a GAAP basis, net loss in the fourth quarter of 2010 was $532,000 or a loss of 2 cents per share compared with a net income of $952,000 or 3 cents per share in the prior-year quarter. Quarterly adjusted (excluding special items) EPS was a loss of 6 cents, significantly higher than the Zacks Consensus Estimate of a break-even.
Revenue
Total revenue in the fourth quarter of 2010 came in at $119.3 million, up 34.6% year over year, outpacing the Zacks Consensus Estimate of $114 million. However, Novatel recorded $6.5 million of revenue from Enfora Inc., which it acquired in last November. Excluding this, organic quarterly revenue was $112.8 million, in line with the company’s guidance range of $110 million – $115 million.
Revenue by product category
Revenue from Core products, which include 3G USB modems and PC cards, declined 42.8% year over year to $31.3 million. Revenue from MiFi product line increased 165.6% year over year to $76.5 million. Embedded module sales inched down 2% year over year to $5 million. Enfora products generated the remaining $6.5 million of revenue.
GAAP gross margin was 18.2% compared with 26.2% in the year-ago quarter. Gross margin declined due to customer mix that reduced average selling prices, expedited freight costs as a result of component shortages. Operating expenses, in the reported quarter, were $27.7 million compared with $22.4 million in the prior-year quarter.
During fiscal 2010, Novatel generated $6.2 million of cash from operations compared with $36.7 million in fiscal 2009. Free cash flow (cash flow from operations less capital expenditures) during fiscal 2010 was a negative $4.6 million compared with $30.9 million in fiscal 2009.
Balance Sheet
At the end of fiscal 2010, Novatel had approximately $97.8 million of cash & marketable securities on its balance sheet compared with $148.4 million at the end of fiscal 2009. The balance sheet of Novatel remains debt free.
Future Financial outlook
Management provided revenue guidance for the first quarter of 2011 in the range of $60 million – $80 million. The mid-point of $70 million is far below the current Zacks Consensus Estimate of $104 million.
Non-GAAP gross margin will be around 19%-20%. Non-GAAP loss per share will be in the range of 48 cents to 36 cents. Its mid-point of a loss of 42 cents per share is markedly in contrast of the current Zacks Consensus Estimate of a gain of 2 cents per share.
Recommendation
The recent trend of the 3G USB modem industry is indicating a glut of inventory on the part of the wireless carriers. Verizon Wireless (VZ), an important customer of Novatel for its MiFi intelligent hotspot, may generate lukewarm demand in the first quarter of 2011 attributable to its huge modem inventory.
We therefore maintain our long-term Underperform recommendation for Novatel. Currently, it holds a short-term Zacks #4 Rank (Sell) on the stock.
NOVATEL WIRELES (NVTL): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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