Good afternoon ladies and gentlemen. Thank you for standing by welcome to the Novatel Wireless Second Quarter 2009 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference call is recorded today, Thursday, July 30 of 2009. I would now like turn the conference over to Julie Cunningham, VP of Investor Relations. Please go ahead

Good afternoon everyone and thanks for joining us. The agenda for today's call is as follows: Peter Leparulo, Chairman and CEO, will provide an overview on the quarter and Ken Leddon, Chief Financial Officer will review the second quarter 2009 financial results. As a reminder, this conference call is being broadcast on Thursday July 30th, 2009 over the phone and the Internet to all interested parties. The information shared on this call is effective as of today's date and will not be updated. During this call, non-GAAP financial measures will be discussed. Reconciliations to the most comparable GAAP financial measures are included in our second quarter earnings release, which is available on the Investor Relations page of our website at www.novatelwireless.com. The audio replay of this call will also be archived there. Today's discussion may contain forward-looking statements. These forward-looking statements are not historical facts, but rather are based on the company's current expectations and beliefs. The company's actual results may differ materially. Please refer to our SEC filings for a detailed discussion of potential risks. Now I'd like to introduce Peter Leparulo, Chairman and CEO of Novatel Wireless.

Thanks to all of you for joining us today. Second quarter revenues increased 19% sequentially 84.1 million driven by a rebound in North American USB sales and strong demand by a newly introduced MiFi products. With this introduction two months ago, we have received over $100 million in MiFi orders. This provides clear evidence of the demand for MiFi and we believe it is shaping up to be the best and most important product introduction in our history. Even now many technology companies are still reporting double-digit year-over-year revenue declines we're even approached by your outlook moving forward. We currently expect third quarter revenues to increase from 7% to 13% sequentially, and from 14% to 21% year-over-year based on orders already received. We expect gross margins reached their highest level since 2007 and we expect to generate strong bottom line result. I want to spend the majority of today's call talking about how we believe the MiFi ecosystem has transformed to Novatel Wireless. But first, I need to address the recent turn of events in our embedded business. Our most significant OEM customer in the first half of this year has decided to move to a direct component and sourcing model in an effort to reduce cost. Currently, we expect only nominal revenues from this relationship in Q3 and are somewhat surprise about the speed of this transition. However I do think it is a strong testament to the innovation with the MiFi product line that we are able to smoothly absorb the impact of this decision in our outlook for Q3. Longer term, we believe that embedded revenues can grow again with the addition of two recent eBook reader design wins that will begin to contribute in 2010 and will compliment our laptop OEM customers. Now we'd like to…

Thank you, Peter. I will begin the financial review overview of the second quarter and then will provide our third quarter outlook. Unless specifically noted all comments about our financial results excludes the impact of share-based compensation expense under FAS 123(NYSE:R). Share-based compensation expense net of taxes was approximately 1.5 million in the second quarter of 2009. Let's begin with the second quarter results. Revenues for the second quarter were 84.1 million, a decrease from 89.6 million reported in the prior year period but a 90% increase over the last quarter. Revenues by product category are as follows: embedded products were 35.8 million or 43%, core products which includes USB, PC cards, Express cards and combination products accounted 34.8 million or 41% and MiFi products accounted for 13.5 million or 16% with only six-weeks of contribution during the quarter. Revenues by technology, EV-DO products were 94% and HSPA products were 6%. On the geographic perspective, domestic revenue accounted for approximately 95% of total revenues and international revenues was 5%. During the second quarter, we shifted six operators and ten OEMs in 17 countries. Leading customers in the quarter included Bell, Bright Star, Dell, Foxconn, Sprint, Telefonica and Verizon. Gross margins of 22.3% were below our guidance due to purchase order cancellation cost of 2.1 million related to a significant customer order that was cancelled during the quarter. We are pursuing reimbursement of these costs but have not yet recorded a receivable related to this matter. Excluding this charge, non-GAAP gross margin would have been 24.8% at a high-end of our guidance range. Second quarter operating expenses were 21.8% of revenues or 18.4 million. Total operating expenses in absolute dollars were down 8% compared to the prior year period. R&D expenses totaled $10 million or 11.9% of revenues. Sales and marketing…

Thanks very much, Ken. To wrap up, we made significant progress in Q2, which we believe positions to move forward on its long-term vision. The introduction of MiFi, thus far has been very good and we expect to capitalize on this demand, by expanding our distribution channels, continuing to build our brand and pursuing continued innovation at all times. And now Ken and I would like to answer your questions. Operator, please open it up for Q&A.

Thanks, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). And our question comes from the line of Matthew Hoffman with Cowen and Company. Please go ahead.

Peter, Ken, excellent job managing a smooth transition here from embedded to MiFi. Got a question for you on the competitive environment, there has been a lot of I call misinformation out there about growth surfer the, wide way, one connection product use from wireless talk through what you see coming here in third and fourth quarter from your primary competitors on the MiFi front. Thanks.

Sure. Thanks very much on that. In terms of competitor landscape on MiFi, we do look to see is that there maybe new entrants in the market. We haven't seen anything that we would talk to market in the third quarter, which would have the same features and functionality of our MiFi product line. So when we look at, now we look towards -- closely towards the end of the year, we've done several things on this both on the hardware and the software side and the IP side, which we believe will not only create a barrier to that but which will also, when we see competition come on board give us a greater lead even in competitive landscape. The ways in that we have worked fairly hard at putting as much IP around the MiFi product line and announced some of that IPs in a press release last week. We believe that some of those are key patterns and we also have significantly more patterns pending. MiFi as well is not simple piece of hardware. It's an entire ecosystem, which we're trying to pull together. So we believe that even that we see some hardware which has -- which tries to come on line as meeting product, we believe that we will continue to advance our competitive lead with applications and software, which we'll continue to make the ecosystem more defensible as we go forward.

So it's sound like, if I hear you right, there is a bit more of a defensive a barrier here that you've actually with IP than you had in other product cycles like USB. Is that fair way to think of the IP atleast as hurdles for your competitors?

We have -- this is a branded category that we believe we created. And even Gardner assigned in the category of Intelligent Mobile Hotspots. We put IP around power control in this around the configuration of the wide area and the local area in it. We put IP around how you communicate with the device, how the device communicates with the server as much as we possibly can correct.

All right. And then last question from me. The $100 million figure; how should we think of that are you recognizing the bulk of that here in 3Q or is this a figure, which will stretch out over several quarters and are you still building that backlog? Thanks.

The $100 million that we have in orders our schedule to shift throughout the balance of the year, it's not on Q3. We are still building to that, that $100 million as you might imagine we're doing quite a good about blocking and tackling on the supply chain side, and on the production capacity side to meet request states for the order flow that we have seen on this.

Perfect and congratulations.

Thank you.

Thanks very much Matt.

And your next question comes from the line of Mike Walkley with Piper Jaffray. Please go ahead.

Great. Thank you very much and congratulations on the MiFi launch. And just using a math question on the 100 million backlog; when you talk about trial activity around the world, are those in order now or its trail before hits the order book?

I'm sorry, could you louder a bit on that. There is a lot here, I'm not sure I got it.

Sure. You just talked about being an multiple carrier activity for trails with the MiFi products, just wondering if that would be in your order book yet or is that orders to come?

That is not in our order book. We well, let me add to that a bit, we have commitments to launch and we're in various stages of certification cycles on those commitments to launch. With some of those operators, we do get some initial stocking orders but that is not, it really in anyway shape or form a significant part of that $100 million. So when we talked about the numerous operators that were in type approval and certification with and were launch with throughout the rest of this year, the orders on those generally come in as we get closer to the end of the certification cycles.

Okay. Great. Thank you. I know its early days for the product, can you share any data on sell through trends or any qualitative data on the sell through and consumer acceptance of the product?

It's a good question and I wish I could, I wish I can give a lot of visibility to it. I can tell you this, that it really has gone into in terms of end users, its gone to consumers, enterprises as well as defined vertical markets. In terms of the sell through data, we just launched and we're beginning to get some anecdotal sell through data. We're -- I tell you we're pleased with what we see in terms of the rate plan and what we believe the elasticity or to be between the rate plans on this and the in-store promotions through the operators but its really to get me for sell through, we're going to wait for the launches to get through a bit more.

Okay. Great. Thank you. And just last question and I'll pass it on, on the customer wind down being quicker than you thought, can you just elaborate a little bit how we should think about that is it virtually nothing in the third quarter or is there a little ramp-down throughout Q3 and then its kind of zeroing out in Q4 for the new customers come on in 2010?

Sure. Thanks. We have -- our guidance does not reflect any revenue from that customer in Q3.

Great. Thank you very much.

Thank you.

And your next question comes from the line of Samuel Wilson with JMP Securities. Please go ahead.

Hi. Good afternoon, gentlemen. First question, how many greater than 10% customers did you have and what size were they?

We have two 10, we have two 10% of greater customers, and the both well north of 10%.

And in the past, you have given out the numbers, do you know that size they were?

In the past, we've had three or four, it's varied by quarter, some are very close to the border line of within 10% but right now, we only have, we have two.

I'm sorry, what was the actual percentage that they were?

Probably somewhere in the range of 60 to 70% at some points.

No, I guess, I'm saying the greater than 10%, are they 20% of the revenues for the June quarter, 30%, that could be a part kind of 51%. I'm just trying to get gauge through with those guys its greater than 10% came out?

Okay. So you want to know the over 10% to those two customers, what percent of the total they comprise?

Yes.

Okay. Just a second here.

Yeah. You said it better than I did.

They comprise about 60, about 70%.

Got it. And then you made the comment that it happened faster than you saw. I just wanted to get a sense there, when in the quarter did Foxconn indicate to u that they were sort of done ordering, was it beginning the quarter or at the end of the quarter?

Let me tell you a little bit Sam, how ran with us much transparency as I can but these customers are generally somewhat type lift on this. We generally get a forecast, a rolling forecast with upside and we in turn act on that against sort of fairly long lead times on this. We have peers that flow from there. In fact in its space, there is a fair amount of pull in, push out in this space as you might imagine, when there is a one-to-one relationship and against that dynamics, at the end of the quarter, we simply do not believe that we had visibility into our future order flow, so that's the point in time, when we began to unwind the downstream commitment.

Got it. And then MiFi, do you gave sense as to because, when we talk Spring store and Verizon stores and they are selling all these things relatively quickly. Do you think you get a sense that in the third quarter, the carrier is going to build up little bit more inventories or given the environment, are they still running relatively lean on MiFi?

It's a very good question. I think on this given the macro environment, we see generally the operators still fairly conservative in managing their inventory levels as you've probably seen in the segment. We've also seen the conservative in their selling ordering cycles. Against that backdrop, we don't have a lot a visibility into the channels. What I can tell you is that the channel has -- almost all channels have launched or begun to launch actually, which took a while to ramp up to, but in most direct channels and enterprise channels, we're beginning to see the launches take place.

Got it. And then my last question for you is do you have some sense if how many developers, I don't know if -- how many do downloaded the software development kit, there are how many people, who have signed up as MiFi developers. So can you give some metric around that at all?

Well, we just opened up the CGI, and that's the first phase of this. So and the CGI people will get access to the modem command. We don't have a lot of feedback. I can tell you the interest is -- have been very high in terms of the sort of bringing our engineers for support on this, even before hand, there is bit of a claimer to at least begin the MiFi developers program. This is the first step of it. And you can get to a couple of places to see the activity that's taking place in terms of developer to developer communication support. At the company, I don't have numbers and I hope to by the next call or even before then, but in terms of the level of support that were being asked to give the developers but we're very enthusiastic.

Great. I'm sorry, one last question I've got handed to me from my colleague. A question on you made the comment about the ecosystem and it ramping and I just want to get a sense for the -- you made a comment on hoe your business transitioning from USB to sort of MiFi asking that ecosystem. How much longer do you expect the USB business to be material, I don't know if that's the right term but how much more do you expect it to sort of sizeable and do you expect it to ramp down over the next one or two years, be stable, how do you envision that happening?

It's a great question, Sam. We're still very enthusiastic about our core business. We still think there is innovations we've done on that and I know we've talked a lot about MiFi, but we've introduce a 2-in-1 product, the combo product, which is a new form factor, which we've gotten what we think is a great reception to. On the USB business, we still believe that there are upgrade cycles, which will be first to market to, which that's when we have our greatest value preposition and providing the operators the first opportunity to offer services at higher throughput rates. So we are -- we do not want to diminish our core business in terms of how we're going to attack it and how we expect to still begin leading position in that business.

Got it. Thank you so much.

Thank you

Thank you. And the next question comes from the line of John Bright with Avondale Partners. Please go ahead.

Thank you. Peter, I came in and out of the call, so I apologize in the event if you might have addressed this, but what implication if any might exist for the joint venture announced earlier in the week between Verizon and Qualcomm for Novatel?

Sure. We don't think that there are any for Novatel. The joint venture that we saw announced really addressed the end-to-end space, which our competitors occupy and now the end-to-end space with the deep industrial end-to-end space. And our understanding of is there will be kind of an open-developer program in that space and then Qualcomm will try to standardize that space to get that space to get more attraction and then historically affect, but as you know John, those are things, smart cover grids, utilities, those are not spaces that we currently occupy. So the impact is we believe is not existing to us.

And you don't think the joint venture that might still over into the -- if you will in to your business at all?

We don't believe so and we have no reason to believe that and look at all of this. The dynamics of that space are different with direct sales teams, and the product development cycles in that space are very different and the en-users in that space are very different.

What -- second question then, we've got a forthcoming technology change in the industry, a network upgrade coming. How might this be a different versus the one we're seeing in the past and when are you thinking that you might the let's just call the industry shift their first product?

Well, let me try to do that a little bit. HSPA plus, we do see that upgrade cycle coming and then LTE as well, that upgrade cycle, are you talking about both of those?

I am.

We believe that we are targeting to be first in both of those technologies, where they are widely commercialized. And we also believe that in the European space and in the North American space, we actually have development partners on this; carrier development partners on this. So we are targeting being first to market in that and we also believe that we have volume distribution channels on those. On the LTE side as well, we are targeting being first market on that. It's a great follow-on question because once we get up to these throughput levels, one of the thing that we are doing in building out ecosystems with some multimedia applications and greater -- application, which require greater throughput, we believe that will be timed very, very well to those technologies. Those are very efficient technologies, where we are trying to go in building out our ecosystem on MiFi and elsewhere.

Okay. And then my last question for you Peter, when should we think about revenues generated that we'll go off from the software for the application side?

Sure. We think this will go in a step-like fashion. We are targeting ourselves to begin to have licensing revenue by the end of this year. But that hasn't influenced because this is a new business and it's new to the operators as well and it's new to our other channels. But we are expecting to have -- we're targeting internally licensing revenue with where we're going by the end of the year.

All right. Thank you.

Thank you, John.

Thank you. (Operator Instructions). And our next question comes from the line of Anthony Stoss with Craig-Hallum. Please go ahead.

And great job on your MiFi launch. Peter, if you wouldn't mind, I wasn't clear of the 100 million in orders for MiFi, is that from existing transfers before that have been you've announced so far or is there additional ones embedded in that?

There are additional ones that are embedded in that.

And is it fair to say that, I know you mentioned second half of 2009, more carriers coming on line, I would assume obviously there is more coming out in Q3. Can you give us a sense of the European based, U.S. based, Asian based?

I've got a throughput, it is what I believe -- well, let me say before the end of the year on our set of bonds right now it, is Europe, North America and Asia.

Okay.

So we're on a worldwide mode with MiFi launches.

That's great. Do you believe, I know production limited you in Q2, do you think production will meet demand for Q3 on MiFi?

It's a good question and then its bit of we've been talking, Tony. We have -- there are two elements of production on this. There is our production capacity and then there is the supply chain component side. Once we started to see the attraction that we're gaining, we immediately put our efforts on both of those. The production capacity in terms of fixtures, test equipment, we believe that we can start to meet -- we can demand going forward. The components side is a daily blocking and tackled with parts on hands, parts on order allocation, this is what we do. But that is the daily blocking and tackling. But we're pretty comfortable that we're maximizing as much as we can.

And also just to be clear on the app side, sounds like you are intending the launch applications kind of late Q3 through Q4 timeframe?

We expect to role out application in the second half of 2009, some of those native applications to MiFi, more server based applications, ones where we have a different sales cycle might go into the beginning of 2010 but we do expect to launch applications in 2009.

Also to be clear you fully booked your guidance right now?

Fully booked our guidance, I'm not sure we give that number out, but our guidance is probably based on orders on hand and again some of the MiFi orders are scheduled for Q4.

Great. Great job, guys. Thank you.

Thanks, Tony.

Thanks, Tony.

Thank you. And management, there are no further questions. I'll turn the conference back over to you for any closing comments you might have.

Thank you very much operator. Everybody, thanks very much for joining us today and we look forward to seeing actually many of you next month in Boston and New York. Thanks again.

Thank you. And ladies and gentlemen that will conclude today's teleconference. Thank you for using ACP Conferencing. You may now disconnect.