Inseego Corp. (INSG) Q4 2011 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Novatel Wireless fourth quarter 2011 conference call. [Operator Instructions] This conference is being recorded today Wednesday February 22 of 2012. I would now like to turn the conference over to Mr. Bill Walkowiak. Please go ahead sir.

Good afternoon and thank you for joining our fourth quarter 2011 conference call. We will begin with the business overview, of Chairman and CEO Peter Leparulo followed by a financial overview for the first quarter guidance by the Chief Financial Officer, Ken Leddon. We will then open the call for questions. As a reminder, this conference call is being broadcasted on Wednesday February 22, 2012 over the phone and the internet to all investment parties. Information shared in 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 directly comparable GAAP financial measures are included in our earnings release, which is available in the Investor Section our website. The 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. Now I’d like to introduce Peter Leparulo, Chairman and Chief Executive Officer of Novatel Wireless.

Thanks Bill. Good afternoon and thank you for joining us on the call today. I am pleased to report that the fourth quarter results reflected continued improvement in our operating performance. This was the third consecutive quarter improvement in key non-GAAP metrics such as gross margin which reached 24.5%, operating earnings of $1.1 million and EBITDA of $3.7 million, leading to non-GAAP earnings per share of $.05. In looking at our product categories, in mobile broadband devices we continue to lead the North American market with revenue of $94 million for the quarter and $337 million for the full year. Our MiFi product launch for the quarter included revenues from 6 MiFi models across both 3G and 4G. We are [indiscernible] of our mobile broadband products in existing channels and are working to add additional retail and pre-paid channels this coming year. We also had a recent competitive win in the Canadian market with TELUS which launched our Ovation MC679 modem on their LCD [ph] network. We now count 2 major Canadian operators in our customer list. We expect to introduce a number of new products this year for our mobile broadband device category. For example, a new global version of our MiFi Intelligent Mobile Hotspot, MiFi 4620L, was announced at the Consumer Electronics Show last month. It will soon be available through Verizon Wireless retail outlets. With this global MiFi hotspot, Verizon customers can conveniently access mobile broadband service when traveling worldwide. The MiFi 4620L is also the first mobile hotspot to provide GPS support over WiFi enabling applications to access screening GPS services wirelessly. Moving forward, we are working with anchor tier-1 North American operator to get again significantly advanced MiFi products family with several new classes which we expect to launch later this year. We believe these new classes will expand the reach of MiFi to new categories of customers, and of course we will be building on a solid foundation of the most recognized mobile hotspot brand in industry with award-winning innovation and design, proven performance, and a user experience that is superior to any other mobile hotspot technology. Our technology innovation applies equally to our embedded solutions product category. This is another area where we are making progress in product diversification and adding important new customers. Our mobile computing embedded module revenue more than doubled year-over-year with a customer list that included Dell, HP, Samsung, and others. Our mobile computing portfolio and design wins are principally on 4G. We have seen slower than expected uptake in 4G enabled platforms relative to 3G and expect it to continue until the new model is here [ph] for our OEM customers, which generally starts closer to mid year. As a result, we believe growth in this category will build over time as 4G is more broadly adopted. We are currently integrating our embedded module computing projects into an increasing number of new platforms across tier-1 carriers in North America for launch throughout 2012. In addition to these PC OEMs we are also working with various new partners who are incorporating our 4G LTE module to a variety of new applications. We showcased 10 of these innovative new concepts at the Consumer Electronics Show ranging from energy and security to tele-health applications. In M2M embedded solutions our strategy is to bring together major cellular technologies on a common footprint allowing us to adjust more segments of the market. In January, we announced the expansion of our portfolio with 2 new enabler M2M modules, which will add CDMA and HSDPA capabilities to our portfolio. These will be powered by [indiscernible] smart agent platform. This platform enables a proprietary event processing engine [indiscernible] firmware upgrade support, and other features that allow us to readily support customized requirements in various M2M vertical segments. As a result, our solutions will soon include a comprehensive portfolio that ranges from 2G to 4G and across GSM, CDMA, and LTE standards. Going forward, we are seeing additional opportunities to grow our customer base, ranging from new design cycles migrating to 3G to new carriers focused on the M2M space, as well as adding new M2M market segments. Following the [indiscernible] acquisition we now have a team that’s completely focused on this initiative in M2M embedded solutions. In the asset management solution and services product category we have generated sales and margin growth for 3 consecutive quarters. We see several important trends taking place in this category. First, the market for integrated asset management solutions continues to scale on a global basis. Second, multiple carriers and technologies are now needed to be supported. Third, customers will continue to drive to lower the total cost of ownership to device and reliability and on-board intelligence. These all play to our strengths. We have a large global footprint to address the growth of this space and are making solid progress in expanding our line of intelligent devices. This includes introducing a number of new solutions that for the first time incorporates CDMA and 3G technologies leveraged [ph] from our embedded solutions R&D. [Indiscernible] has been constrained with only 2 integrated lines, the Spider AT and MT based on GPRS, which in turn limited its ability to fully address the markets. We currently expect to introduce at least 6 new integrated solutions this year including products with onboard diagnostics for fleet management and solutions for user based insurance applications. These will be designed to provide a combination of price and functionality needed for large scale adoption across our target applications. In combination with these intelligent devices we are also greatly expanding the services feature and capabilities of the [indiscernible] communications and management software platform, which greatly simplifies the implementation and management of new M2M deployments. We are very excited to be working with a number of carriers and MVNOs to offer CMS services and software and targeted vertical markets including telematics, insurance, fleet management, and tracking. Together we anticipate a wide range of new asset management applications. The need to management’s communication and data in a seamless and standardized way has been a major roadblock for widespread M2M adoption. The robust features of our CMS services platform mitigate this problem. The CMS services platform begins with enabling remote provisioning, monitoring, support and reconfiguration of M2M devices from almost anywhere in the world. But it will then go well beyond that to interface with either cloud based or enterprise based applications to fully manage wireless device services and data. The CMS platform will quickly link devices to existing applications and ease the transition to new technology. In other words, CMS will be a full scale M2M asset management solution that not only delivers data to the enterprise but manages deployed devices. On this point let me just add that over the next year I expect to see the thesis of our 4 [ph] acquisition begin to reach fruition as we fully leverage the strength of our mobile computing and M2M businesses. Our sales pipeline and customer engagements are growing, we now have dedicated teams on M2M embedded, M2M asset management solutions, and the CMS platform. We are seeing enthusiasm for potential enterprise customers as well as from our carrier and development partners. We remain optimistic that our M2M business will grow as our new solutions are implemented and our sales have gained traction. Overall, we will continue to leverage our extensive expertise and R&D investment to drive long term revenue growth while tightly controlling operating expenses. Now for a discussion of our financial results I will turn the call over to Ken.

Thank you Peter. I will begin with a financial overview of the fourth quarter, and then will provide our outlook for the first quarter of 2012. Please note that our Q4 non-GAAP result exclude stock-based compensation charges of $1.9 million and in 4 acquisitions related charges for amortization of intangible asset and the integration cost that totaled $1.5 million. A complete GAAP to non-GAAP reconciliation table is included in our press release. Revenue for the third quarter was $109.8 million within the range of our guidance of $105 million to $120 million. Revenue declined compared to the same quarter last year, primarily because of the prior year’s revenue that benefited from a variety of promotions related to their introduction of the iPad which was bundled with our MiFi 2200. Revenue for the full year up $402.9 million as Peter mentioned was up 19%.Looking at revenues by product categories, mobile broadband devices accounted for $93.9 million or 86% of sales. This includes MiFi revenues of $72.4 million and USB modem, combination cards and related products at $21.5 million. Embedded solutions accounted for $78.8 million or 7% of revenue. This included $3.4 million in sales of M2M modules and $4.4 million of OEM embedded modules. Asset management solutions and services, which includes our Spider Intelligent terminal devices and CMS gateway software accounted for $8.1 million or 7% of revenue. Looking at revenue by technology, LTE moved to $84.3 million or 77% of our revenue. From a geographic perspective, North American sales accounted for approximately 94% of our total revenue and international sales were 6%.The non GAAP gross margin in the fourth quarter was 24.5%. This exceeded our guidance of 23% and represented a year-over-year improvement of 460 basis points. Operating expenses on a non-GAAP basis totaled $25.8 million or 23.5% of revenue, which was approximately $1.1 million lower than the third quarter reflecting our continuing efforts to control operating expenses. We are doing operating expense by category. R&D expenses were $15.1 million or 13.8% of revenue and that compared to $14.6 million in the third quarter, a $0.5 million reduction. Sales and marketing expenses were $6.7 million or 6.1% of revenue, down from $6.9 million in the third quarter, a $200,000 reduction. And lastly, G&A expenses were $4 million or 3.7% of revenue, a $1.4 million decline from the $5.4 million reported in the third quarter. Our non-GAAP operating income was $1.1 million for the quarter, non-GAAP net income was $1.5 million or $0.05 per share and we generated EBITDA of $3.7 million during the quarter. Capital expenditures were $1.1 million bringing the year-to-date total to $6 million. Cash flow from operations in the fourth quarter was $25.2 million, bringing our balance of cash and marketable securities at year end to $88.8 million or $2.78 per share. Turning to guidance for the first quarter of 2012. We currently expect first quarter revenues to be in the range of $85 million to $110 million. We recognize that this is a wide range. The $25 million difference for which we already have orders for Q1 delivery is due to the uncertain timing of a major new product. This product is currently in its final stage of certification and will launch either in March or early in the second quarter. We anticipate that gross margins will be approximately 24% to 25% of sales and finally we expect non-GAAP EPS to be in the range of an $0.18 loss to a $0.06 profit for the quarter. These estimates are based on approximately 32.2 million shares outstanding. Now I will turn the call back to Peter.

Thanks very much Ken. In summary, we are making steady progress in expanding our product lines, diversifying our customer base, and driving growth and innovation. We move ahead into 2012 with optimism about our strong MiFi brand, growth in our embedded module business and the long-term potential of our M2M services and solutions. Now, Ken and I would be happy to answer your questions. Operator, you can now please open up for Q&A.

Ladies and gentlemen, at this time we will begin the question and answer session. [Operator Instructions] Our first question comes from the line of Mike Walkley with Canaccord Genuity.

This is Matt Ramsay on for Mike.

The first question, Peter I just wanted to dive into some trends in your MiFi sales. You discussed in your prepared remarks some slower LTE uptakes than you had anticipated, and I think we’ve all seen that both in smartphones and in your business. But your revenue in that space was essentially flat, a little bit up in the quarter, so are you basically seeing some consolidation of share to your products at Verizon, your main customer, or have you seen a pickup in any other business, say Sprint or AT&T with the products there?

Actually let me [indiscernible] because I was talking about [indiscernible]. On the MiFi space we are actually seeing very robust sell-through in MiFi product category at our principle customers. That is increase [ph]. We move over to the embedded space. The embedded space on 4G which is where our design wins, that has been slower than what we originally anticipated. And I think that’s the result of a couple of things. Number one, it’s going to be a little bit more volatile in that space because it’s a smaller portion of our revenue until that becomes a larger portion of our revenue. Maybe even more important is we see LTE coexisting with 3G more so in the embedded space than we do in the external device space. We expect that change going forward and we are integrating into a lot more platforms than we have reflective in our revenue for the second half of 2011. So we are looking at that space and optimistic about that space growing, but in that embedded space is where the LTE has been slower than we anticipated.

Okay, great. Thank you for clearing me up there and for the additional color. One more, since you dove into the embedded space one more question there. Basically Ericsson announced that they are going to be exiting that business sometime I guess in time for product refreshes in 2013. Could you add any of your perspective on the potential size or revenue opportunity or timing of revenue opportunity for you guys and what share you might be able to take of that business that they are exiting?

You are right Ericsson announced that they are exiting that space. I don’t have a lot much commentary in terms of how much share we could take in that space. Those go by the RFQ [ph] cycles which are actually getting right now. I would target 2013 to see any momentum in that space. You are right, the substantial market shares is what the public receptioners [ph] do.

Okay, fair enough. I guess Ken, I’ll dive into a couple of questions for you. Coming into Q4 you guys have guided gross margin down and then obviously trended well above that. You had guided it down, one of the reasons that you had cited in the last call was some impact expected from moving contract manufactures from Korea to China. Could you give us some color on what the impact was, if any, from that in the quarter and given that and you still beat the gross margin guidance. In what particular product lines or for what reasons did you see the big gross margin improvement?

Let me take the 2 topics separately. The first one is the impact of moving our manufacturing from one contract manufacture to another. The impact of that is minimal at this point. That is still under way, and we do not believe it significantly impacted our gross margins to this point or cost of goods sold. I think what drove the favorable effect of the gross margin in this quarter was a much higher mix of the LTE external device product, and less of the 3G product that we were selling in prior quarters.

Okay, great. One last question from me and I will pass the line. I thought it was interesting in your guidance for the March quarter that obviously had the wide range on the revenue and earnings side that you had discussed about the potential for a product launch and the timing of that. I thought it was interesting though that your gross margin guidance range was really thin. And I wonder if you could talk about the reasons for that relative to the wide range of your sales and earnings guidance and what does that say about any potential flexibility you guys have around fixed cost?

First, I don’t think there won't be much leveraging effect given there are relatively constant revenue level assuming the launch is successful. The range of the gross margin, I think what we try to do is encompass there, what the range might be if we ended up at the low end versus the high end, because the absorption of the fixed costs would have a different impact at those 2 levels. I think what we are seeing too is that margins of the large to new one existing is not all that different.

Our next question comes from the line of Matthew Hoffman with Cowen and Company.

Peter and Ken, it’s Bryan for Matt. Hey I’ll be brief because Matt asked I think 4 out of the 5 questions. Last quarter’s guidance, you were discounting $3 million to $4 million M2M products potentially impacted by Thailand flooding, is there a similar impact or at least a - could you give us some color on how that timeline looks on M2M in 1Q and going forward?

Yes, the Thai [ph] issue has been substantially resolved and I don’t view that as being a significant impact on revenue this quarter. It really related to 2 elements, one was a component issue and the second was a production facility and the team moved production into another facility and based on inventory on hand was managed to mitigate the impact of that so. I don’t think that’s a factor going forward.

Okay, that’s good and then second, following up on these question on MiFi. The revenue growth is very slight quarter-on-quarter, but global 4G LTE net connection growth in counter [ph] 4Q was pretty substantial. Could you talk about your share position in 4G LTE multi-data devices and whether or not that’s in your view moved. Is it stable through Q4 or is there any linearity during the quarter that you can speak to? Thanks.

I think we were relatively linear during the quarter and on a unit basis in MiFi our lead operators quarter-over-quarter it’s increased. I think what you are seeing now is an ebb and flow in the slot of different products with different points in time. So where there is a consistent customer base if you will or you know the same customer, that has expanded, but the product slots and the promotions behind individual products has ebbed and flowed among different products. We expect that to going forward we expect to have more slots and more operators and what I tried to do in the prepared remarks were talk about with North American operators is we expect to have additional slots throughout 2012. So I would expect an expansion of the number of customers on LTE to be driving the revenue expansion on it.

And the number of customers that will be international as well as North American?

If the international MiFi as you know is you know in Europe, you know, for LTE outside of embedded I would benchmark you know 2013 more than 2012, but it will be mostly North American.

Our next question comes from the line of Kevin Manning with CMO Capital Market.

Couple of quick questions. The floor uptake of embedded LTE can you give us a sense of what you think is behind that? Is it ASTs [ph] are too high or is it tablets are weighing on the market. Just any insight that will be appreciated?

I will point to 2 principle items Kevin. The cost of LTE is simply higher than the cost of 3G. So you have to measure that cost differential against the different user experience in those [indiscernible] number one and number two, you have the European market predominantly on dual carrier HSPA still and so there has not been that upgrade cycle on the European side of the house. Those are the 2 principle things that I would attribute as the reason for why you know LTE has not eclipsed 3G in embedded as in external devices.

And then on Apex [ph], you know, saw some improvement on Apex is that something we are going to see further improvements on in further quarters or is it going to be at a pretty consistent run rate?

This is Ken speaking Kevin. Our view to currently that this got to be fairly consistent. You know we do trim away wherever we can, where we get an opportunity to trim and we monitor very closely but overall I think we are looking for Apex to be stable you know within relatively visible future.

[Operator Instructions] Our next question comes from the line of Ron Ruben [ph] with Ruben [ph] Capital Investment.

"A/> I have a couple of questions. In regard to the GAAP adjustments you showed a litigation accrual for the penny-a-share. Is this something we should expect on a quarter-by-quarter basis or is this something that just to expect [indiscernible] in the fourth quarter.

It’s not something you can except on a quarterly basis, these things happen when they happen you know. We list our litigation, all our SEC reports, and every now and then there is some activity on then and it’s highly unpredictable. But no, it’s not something that we would expect on a regular basis. But you know that will happen you know time off and on possibly, but nothing with any level of regularity.

Our next question comes from the line of Scott Roth [ph] with Southern River.

Can you - it’s been about a year now since you guys required [ph] a report. Could you go over some of the lessons learned and I would be curious to know from the time when you guys acquired them if you have a similar headcount or if you have been able to consolidate some of those functions there? And then more specifically what you guys have done in sales force? Have you integrated that or does it continue to operate as a separate sales force?

Sure. On the [indiscernible] 2011, there were some lessons learned. And 4 in 2011 had some external factors that impacted a loss of one customer, an application service provider. That wasn’t a terribly healthy part of the business to begin with, as well as the Thai flooding had an impact as well on revenue. In terms of headcount in integration, the way that we have situated the position is right now if you get the optimal efficiency. So in terms of the sales teams, those are dedicated sales teams in 3 different groups: embedded, integrated solutions and the CMS platform software solutions and middleware. That type of business focuses on the sales side. That’s brought up at the bottom by a - I would say a common R&D effort but not a fully integrated R&D effort, just again to keep the focus on it. So the common R&D effort uses a crossover skill set, crossover knowledge base between the 2 companies, and where we can, a crossover in a development platform strategy. So you can ultimately have a core platform and get many products out of it in the most efficient way. The operations team in manufacturing as well is - I would say combined, but not fully integrated so that it gets all of the efficiencies out of it but still maintains a business unit focus.

Would you guys say that is optimized now for how would like to run in the future or you think you will be continuing to make some improvements there?

It will continue to make improvements, mostly around the product side because one of the things that constrained [indiscernible] was, we wanted to bring a full roadmap into [indiscernible]. CDMAs and CDMA operators have a key focus in M2M as well as 3G as some elements of M2M like industrial automation tend to migrate up towards the higher throughput generation air [ph] interfaces. So there are still efficiencies that we think that we have there as we go forward.

There are no further questions in the queue at this time. I would now like to turn the conference back over to Peter Leparulo for any closing remarks.

Thanks operator, and thanks everyone for your attention and questions today and we look forward to updating you as we progress through the quarter. Thanks very much.

Ladies and gentlemen, that concludes the Novatel Wireless fourth quarter 2011 conference call. Thank you for your participation. You may now disconnect.