Recently, Novatel Wireless Inc. (NVTL) has launched an innovative product portfolio for customer broadband access capable of supporting next-generation (4G) super-fast wireless broadband networks of WiMAX and LTE. The portfolio includes LTE embedded modules, USB devices and WiMAX-capable MiFi Intelligent mobile hotspots.
Just two weeks ago, Novatel has introduced Ovation MC545 USB modem for Dual-Carrier HSPA+ networks. Ovation MC545 theoretically supports downlink speed of 42 Mbps and 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 the operator’s network. Another advantage of Ovation MC545 is that it is the industry’s smallest dual-carrier HSPA+ modem.
According to our analysis, proper execution of cost structure and expected launch of 4G (LTE) embedded products are likely to benefit the company’s earnings power in future reporting quarters. Management announced that it has already won a design contract for LTE enabled-product from a Tier 1 manufacturer. All these products are expected to be introduced in late 2010 and may help the company to expend its margins in 2011.
Novatel has also decided to launch MiFi OS with five tier 1 wireless operators in the 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.
However, intensifying competition for embedded modules is the major concern for Novatel. In addition to its traditional rival Sierra Wireless Inc. (SWIR), the company is facing significant challenges from newly launched products by large manufacturers including Qualcomm Inc. (QCOM) and L.M. Ericsson AB (ERIC). 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.
We maintain our long-term Neutral recommendation for Novatel. Currently it is a short-term Zacks #3 Rank (Hold) stock.
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