Inseego Corp. (INSG) Q1 2012 Earnings Report, Transcript and Summary

Good day and welcome to the Novatel Wireless Inc., Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. William A. Walkowiak, Vice President Finance and Investor Relations. Mr. Walkowiak. The floor is yours, sir.

Thank you, operator and good afternoon and thanks to everyone for joining our first quarter 2012 conference call. We will begin with the business overview from Chairman and CEO, Peter Leparulo followed by a financial overview with first quarter guidance from Chief Financial Officer Ken Leddon. We will then open the call for questions. As a reminder, this conference call is being broadcast on Wednesday May 2, over the phone and the Internet to all interested parties. The information shared in this call is effective as of today’s date and will not be updated. During the call, non-GAAP financial measures will be discussed. Reconciliation to the most directly comparable GAAP financial measures are included in our earnings release, which is available in the investor section of 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 our call today. First quarter revenue reflects significant improvement over the first quarter of 2011 and with solidly within our guidance range. Having certified and shipped approximately $10 million in initial stocking orders with our new global MiFi 4620 in the last weeks of the quarter. Although prior year quarter was constrained by launch delays, revenue was up 62%. And we improved non-GAAP earnings by $13 million, reducing the non-GAAP loss per share to $0.14. During the quarter, we further established our preeminence in 4G. In just over several quarters, we have commercialized 5 LTE products across our mobile computing portfolio, including Ovation 551 USB, our MiFi 4510 and 2 mobile computing embedded solutions, our E371 and E362. Our preeminence in 4G has made us a favorite partner by customers with whom we are working to develop new 4G products. Over the next year, we expect growth to be driven by these efforts. We are currently and jointly working with all 3 of major North American carriers for new versions and classes of our MiFi product line. We do not believe our immediate competitors will occupy the same market position among North American operators. Excuse me. The newly launched MiFi 4620 showcases our latest technology, delivering added functionality and advancing the user experience while maintaining ease of use and a focus on breakthrough design elements. The MiFi 4620 is a truly global hot spot that can be used in more than 200 countries. It has an interactive display, more robust GPS capabilities and the ability to connect up to 10 Wi-Fi-enabled devices. Drawing from the experience obtained from the more than 4 million MiFis we’ve shipped, including feedback from hundreds of users, focus groups, and trials, we have compiled a breadth of knowledge about key performance indicators that nobody else has. We’ve incorporated many feature that help make the entire out of box user experience simple, easy, and more user friendly. Perhaps most important, we extended the battery life to almost a full day’s work session without recharging. Through a combination of a new optional battery and our own firmware that optimizes power management. A review by PC Magazine which awarded the MiFi 4620 as Editor’s Choice, "We were able to get 7 hours and 16 minutes of LTE streaming with it, which is exceptional." To give you a sense of perspective, this is the equivalent of live streaming of 4 average feature length movies on a mobile device. We’ve also improved the longevity of the cellular connection. As Charlie White, a reviewer for Mashable Top Tech said, "Its most dazzling feature is the way it links up to the LTE network with quick activity and broadband like speeds." Longer term we see a bright future for evolving MiFi product family. Sell through of our MiFi products continues to improve and we expect demand to grow as we advance the MiFi product family with several new versions. One of our objectives in the mobile computing space is to open new channels that leverage our product lines as much as possible. During the quarter, we advanced this initiative in several ways. WalMart selected us for their in-house mobile broadband offer. WalMart’s Internet on the go program will open with almost 1,500 stores nationwide. This is an exclusive brand offer of our 3G MiFi 220 Hotspot. Our new customer ALJ is installing MiFi Hotspot into Toyota, Lexus and I have 2 vehicles giving passengers internet access as they travel. We will also supply 15 world carriers as part of the LTE World America program which we use the MiFi as the substitute for traditional wire based equipment. And we are launching a version of our modified 4510 with Verizon Wireless for the prepay market with channels at Walmart, Best Buy, Video Shack, Costco and Sam’s Club. We also see a number of market catalysts for future growth. The success of Wi-Fi-enabled tablets is adding millions of potential users, for them Wi-Fi is the perfect solution when they are on the road. And another catalyst is the so called Family Share plans that many carriers are expected to introduce for data subscribers. These plans would encourage the use of multiple MiFi hotspots under a single shared subscription. Going forward, we will further increase the use cases around the MiFi hotspot families. I believe you will be surprised by the level of innovation and invention that we will deliver to the market on the level comparable to our first introduction of this product category a couple of years ago. As we discussed before, we believe growth of steady state business in M2M asset management solutions will begin when we bring CDMA and HSPA into all 3 of important form factors. Our onboard diagnostics line, our asset tracking line and our mobile tracking line. We are on schedule to introduce these new M2M integrated solutions before year end, including the fleet management and user based insurance applications that we announced in March. These are being designed to provide a combination of price and functionality needed for large scale adoption across our target applications. We are also seeing new customer wins with our current portfolio. We have received orders for our asset tracking product lines from TelTel a leading Mexican operator for fleet management and stolen vehicle recovery. We signed a supply agreement with NexTraq a telematics company for fleet management devices. We will also supply our mobile tracking devices to low Jack S.E.I. for personal emergency tracking and digital planning in the middle east for fleet tracking applications. C-Tell Corporation in Sweden is integrating our AT3000 and NT3000 devices into automobile applications in Europe, where there are increasing requirements for tracking devices in vehicles. And Triple Track, another new customer, is using our mobile tagging devices for high value assets. A key element of our integrated solutions for fleet management and usage-based insurance are easy to install devices that plug into vehicles. And are managed by our proprietary CMS communications and management software, making deployment and maintenance virtually effortless. Even for small business, we recently signed an agreement for an asset tracking solution that includes a per copy license fees and annual maintenance services that will provide a recurring revenue stream. We’re also focused on further development of the capabilities of the CMS platform, which is critical to manage large-scale M2M deployments. Our CMS platform not only delivers data to the enterprise, but manages deployed devices. As a result of these efforts, we have had more enterprising engagements and trials over the past quarter than ever before in our targeted vertical markets. Moving on to our embedded solutions product category. The market acceptance of mobile computing embedded LTE capabilities has been disappointing us for both us and our PC OEM customers. Nonetheless, we remain one of the primary suppliers of LTE module to leading OEMs and expect the conversion to LTE to build momentum over time. On the M2M embedded side, we also expect to see growth when we supplement our enabler line with both CDMA and HSPA embedded solutions. We recently announced the availability of functional samples of our enabler HS3001 supporting CDMA networks. This low power platform combines small size with industry leading performance and will be powered by the intelligence of our CMS agent onboard to allow for device provisioning and management. It is ideal for applications that demand high reliability and the future proof design such as security, energy, telemetry, asset tracking, point of sales and M health. And in Europe we're in the early stages of a major smart meter project. Now for a review of our financials and expectation for the second quarter, I’ll turn the call over to Ken.

Thank you, Peter. I will begin with a financial overview of the first quarter and then we’ll provide our outlook for the second quarter of 2012. Please note that our Q1 non-GAAP results exclude the impact of our non-cash, goodwill and intangible asset evaluation impairment charge of $29.3 million related to the acquired tangibles in our M2M products and solution segment that were attributable to the acquisition of Enfora. This is a preliminary estimate that is subject to revision once our impairment analysis is complete. Non-GAAP results also excludes stock-based compensation charges of $1.8 million, restructuring severance charges of $920,000 and non-cash charges for amortization of purchased intangible asset that totals $1.4 million. A complete GAAP to non-GAAP reconciliation table is included in your press release. Revenue for the first quarter was $100.2 million, within the range of a guidance of $85 million to $110 million. Looking at the revenues by product category, mobile broadband devices account for $85.6 million or 85% of revenue. This includes MiFi revenues of $75 million and USB modems, combination cards and related products of $10.6 million. Embedded solutions accounted for $5.8 million or 6% of revenue. It includes $2.5 million of M2M modules and $3.3 million of PC OEM, embedded modules. Asset solutions and services revenue was $8.8 million, which includes $6.8 million from M2M, intelligent terminal devices and CMS gateway software. Looking at revenue by technology, LTE related products were $73.1 million or 73% of revenue. From a geographic perspective, North American sales accounted for approximately 92% of total revenue and international sales were 8%. The non-GAAP gross margin for the first quarter was 22.2%, operating expenses continue to be a key area of management focus. At the end of the first quarter we completed a restructuring that resulted in a force reduction of 21 employees. Non-GAAP operating expenses totaled $26.5 million compared to $25.8 million in the fourth quarter of 2011. Looking at operating expenses by category, R&D expenses were $14.5 million, down from $15.1 million in the fourth quarter. Sales and marketing expenses were $7.3 million compared to $6.7 million in the fourth quarter. And G&A expenses were $4.8 million which compared to $4 million in the fourth quarter. Our non-GAAP operating loss was $4.3 million for the quarter, our non-GAAP net loss was $4.4 million or $0.14 per share. First quarter capital expenditures were $1.2 million. Our balance of cash and marketable securities was $69.2 million at the end of the quarter. Turning to guidance for the second quarter of 2012. We currently expect second quarter revenues to be in the range of $92 million to $104 million. We anticipate the non-GAAP gross margins will be approximately 22% to 23% of sales. And finally, we expect non-GAAP EPS to be in the range of a $0.17 to a $0.07 loss for the quarter. These estimates are based on approximately 32.4 million shares outstanding. Now I will turn the call back to Peter.

Thanks very much, Ken. In summary, we believe that the first quarter demonstrates that we are making progress in expanding our product lines and driving continued innovation into our markets. We expect our opportunities for growth to be driven by the following. In mobile computing, for the first time we are working with all 3 major North American carriers on advanced LTE products. In M2M Asset Management Solutions, we have secured several new customers across numerous verticals and will launch new form factors across all major air interfaces. In M2M embedded, we will bring CDMA and HSPA into our portfolio across the common footprint, powered by the intelligence of our CMS software platform. And now, Ken and I, would be happy to answer your questions. Operator, you may please open up for Q&A.

[Operator Instructions] The first question we have comes from Matthew Hoffman of Cowen & Company.

This is Bryan for Matt. Hey, so a couple of quick questions -- are you seeing any material uptick or change in the regular LTE adoption now that the 4620 MiFi has been in the market for I would say I guess 30 plus days?

I’m sorry, Bryan. Did you say an increase in the rate of uptick of LTE adoption?

Yes, and specifically LTE data devices or and the 4620 in particular I believe that’s the model number I apologize if...

Seriously, that’s right. The 4620 is the next generation. It’s difficult to tell in terms of the 4620 because we just launched that at the end of the quarter, and we’re just beginning to get initial feedback from some of the channels on it. I will tell you independent of the 4620 though is that the movement over to LTE from 3G that’s where we saw the increase in uptick both for our products as well as frankly has an expansion for the entire channel for wireless stated devices. On the 4620, it is still fairly early to tell on the traction until it gets out to the different POS.

Okay fair enough, my -- I guess the 4 million number that you cited for MiFi sales, was that accumulative year to-date as of today or is that through 1Q ‘12.

Cumulative.

Okay and finally I think you said LTE was $73 million, I think that’s down sequentially from 4Q 77, but I think up as a percent of revenue. Is that correct, my quick math there?

That’s correct.

This is Kenneth, that’s correct, Bryan.

And the next question we have comes from Matt Ramsay of Canaccord Genuity.

I guess my first question comes around the write-down of the Enfora assets from -- I guess from your results so far, it seems pretty obvious to me that the performance of this BU hasn't been exactly what you’ve hoped for. I guess Peter, maybe first you could talk about the major reasons behind the poor performance, maybe relative to what you had expected. And second, the industry has been generally pretty positive on their long-term growth drivers for the M2M market. So never mind the near-term, what it seems about your long-term view and for business prospects that warrant such a big write-down?

Sure. Let me again, and I would just -- there were a couple of external factors over 2011. The Thai flood, there was also a loss of one customer in application service provider who had its own apps for one of our vertical markets. Let me think more broadly to it, rather than just the one-off elements. A couple of things. Number one, the Enfora product portfolio had to be advanced forward and refreshed both on its existing technology, the GPRS, faster than we originally thought because simply the atmosphere for the market and the market dynamics called for it. Number two. We also needed to bring CDMA and 3G capabilities into their integrated solutions portfolio in order to open up new opportunities in the markets that we wanted to go into. So as we saw additional CMDA operators enter into the M2M space just as you say there has been a lot of interest in this. We needed to have 1X incorporate into that entire product line. Simultaneously, we also needed to do that on the GSM side and migrate over to 3G. The way that we phased that was to do with the embedded space first on Enfora. So you will see us launch 1X module and then integrate that into several of the integrated solutions -- like I said there are mobile tracker, the asset tracker and then the onboard diagnostic solution. So there has been an overall product portfolio element to it to gain further traction and to open up new opportunities on it. We expect to begin that over the next couple of quarters with pretty much the entire integrated portfolio as well as an embedded portfolio and that will continue through the end of this year. Like I said -- I fully appreciate that it has not achieved the expectations. Nevertheless what we are seeing are some very exciting elements for us once we do that. Like I said on the prepared statements, the number of engagements that were involved in has grown tremendously. The sales pipeline has grown tremendously. And the strategic rationale is for the acquisition which are to triangulate if you will all technologies which was Novatel's strength together with direct enterprise channels which was the Enfora strength together with operator channels which was on the Novatel side -- bringing that together we still very much believe in deal thesis. It’s just going to take longer than we thought. So with that I’ll turn over to Ken to speak about the specific impairments.

Yes. In a nutshell, what drove the impairment reporting was really the fact that the M2M business performance in the recent periods were below what our original expectations were. And it was those original expectation that drove the -- our initial valuation of the company when we bought it. Because some of the opportunities and performance that we had expected initially have been kind of push to the right as we learned that we need to convert to the CDMA and 3G technologies due to the disruption in that market caused by AT&T shutting down the 2G network. I think we thought that would take a little bit longer and in our forecast we did not reflect this disruption as soon. But I think once this product online in Q3 and Q4 this year as well as the new products, we expect to see a recovery in the business but because of the fact that the most recent period was below what we had expected initially. We were forced to reduce our valuation that we normally attribute to the assets when we bought the company back in 2010.

All right. Great. I guess here my next question is for you around the June quarter guide. You mentioned, I think in the press release and maybe -- I don’t know if got in your prepared remarks about your guidance’s been affected by some potential shortages of MiFi components. I guess my assumption is that you are talking about supply of new 28 nanometer chips from your primary modem supplier. First is that a correct assumption and if so is it fair to be concerned about Novatel’s allocation of that limited supply to the remainder of the year given that many larger smartphone OEMs are also vying for the same chips. And I guess around that question, do you have any minimum supply volume or allocation agreements with the main supplier.

Let me -- well I hesitate to talk in this forum about any specific components that are on shortage, Matt. Let me say more generally, we are seeing -- we are constantly relying on components on hand and components on order downstream and delivery schedules on that and it's a daily effort to balance on these. I will say that we are seeing a -- I don’t want to over state it, but we are seeing a variety of tightening up of that effort that we have to make because of just as you say the increase in some other mobile products that compete for those same allocation. We are relatively comfortable where we sit on this, but we do see a bigger effort that we have to make in terms of balancing inventory in hand and on order to make sure that we get our allocation of it.

Okay. I appreciate the sensitivity of the question. I guess my last couple for Ken -- just wanted to talk with you about the gross margin. In the quarter you just reported your revenue came about the middle of the previous guide may be a bit above. But your gross margin came in a bit light is there, did you see particular gross margin pressure in any product line that was just driven by mix -- I guess the short side in the gross margin.

I think our 2 factors, the first one being that was some competitive pressure in the end of Q1 related to the fact that the 4510 was a legacy product and that the market was transitioning to our new 4620 in a lot of the channels. The second item was I think we had expected a little bit of more cost reduction in some of the components that didn't materialize as quickly as we had hoped. And I think those 2 factors combined made us come bit lower than what we had anticipated.

And the next question Jaeson Schmidt of Craig Hallum.

First of what kind of backlog coverage do you have for your guidance, I know you did indicate like the previous question said some component shortages potentially, but how comfortable do you feel with your current order visibility.

Yes. I believe we have very strong backlog coverage for the most part. The uncertainty really is driven by the fact that the carriers and other customers are very JIT oriented with their delivery of product even though there is backlog for a product or a delivery. Delivery dates do move around from part -- one part of the quarter to the next from one quarter to the next and that’s really what drives a lot of our uncertainty that drives the range in our guidance that we’re reporting currently. So I think that we are very comfortable -- we do have significant backlog, it's high percentage for the total quarter guidance but we are subject to delivery date changes.

Okay. And then with the work force reduction at the end of Q1, how should we look at OpEx trending throughout the rest of this year’s?

I think that we are delivering lot of product right now and developing lot of product. What we -- the restructuring was really a realignment of employee skill sets with the development requirements that we have primarily. I think so right now even though we are watching it very closely, I think we are going to see is our OpEx levels overall should remain relatively stable -- maybe go up or down, maybe $1 million or $1.5 million one quarter the next due to the level of certification cost and product development efforts on any given product at any given time. I think we are relatively flat. I think the point to that comment was kind of a big change in our alignment of skill sets and we did want to let everyone know we are focused on that managing that very closely. But -- and we’re also very focused right now in getting a return in all of our development through trying to leverage the developments across as many customers and channels as possible. But I would again if I was to think about our OpEx I would say it’s going to be about flat to where it is now up or down or may be $1 million or something like that. That’s our view today.

And then finally Peter, I know the past few years have been a bit lumpy into the back half of the year. How should we look at kind of growth in the back half of this year. Do you expect benefit from some seasonality or how are you guys looking at that?

See I think a mobile computing, the growth will be -- one other things that like I said -- one of the things we are doing for the first time on LTE is working with all 3 major North American operators. We’ve obviously launched with one North American operator. We are currently timing the second half of the year to launch with another major North American operator with a new product category under MiFi. We believe that would be a catalyst for growth in the mobile computing side in the second half of the year. On the mobile computing embedded that’s -- that one is the most unpredictable I would say for us as I said we are somewhat disappointed as our the PC OEMs with how that has phased from left to right. And so I'm going to leave that out there as somewhat of a wild card on it. And then on the M2M side with integrated, the catalyst for our growth will be towards the end of the year to launch a very robust portfolio and close up the new opportunities that we have for those new product launches in there. So we see -- we’re still not getting annual revenue guidance, but our growth drivers will kick in towards the end of this year is our current view.

The next question we have comes from Kevin Manning of BMO Capital Markets.

Just a quick question on PC OEM business. I think the last comment was that you are unsure on when that starts to recover. Is that something you will be looking at OpEx towards the end of the year, perhaps continue to resize the organization and then I guess just in general it sounds like lot of the growth drivers, might not really contribute until the end of the year. Do you have the right OpEx structure to get you through until then or when would be the time that you start to look at that again?

Just on the PC OEM space we’re looking at that carefully, but we are on LTE and we and our partners on this are pretty significant at Tier 1 OEMs. So a couple of things that have caused that space not to take off like we anticipated or at least this is one of the ways that we look at it. Probably the most common is simply the cost essential between 3G and 4G is fairly significant on that space. There is a [indiscernible] effort on that we are going through on that spacing and which will be somewhat significant R&D effort that we’ll have to amortize across the units on that space. Let me also say that one of the reasons we look at this carefully is that there are some catalysts in that space. One of which is family plans for wireless data, which a couple of the significant operators in North America have talked about launching in 2012. That’s viewed I think by us as well as the OEM partners to be a possible significant catalyst in that space. We are integrating into our and ever increasing number of underlying platforms in that space. That also telegraphs if some of these ecosystem elements can drive, can resolve but -- we still could get traction in that space. When we turn over to the OpEx in that space, we believe that the R&D effort on this is right about right size. We'll revisit it and monitor very, very carefully on this, but we believe generally that the expense management right now in that is sufficient at this point. We’re going to balance it though throughout the year and balance it really with strategy and the opportunities that we see as we go through -- look to 2013 for the embedded OEM space.

[Operator Instructions] Now it appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Thanks, operator. And thanks everybody for your time and attention and your questions today and we look forward to updating you on our progress as we talk again next quarter. Thanks, everybody.

And we thank you, sir, and to the rest of management for your time. The conference has now concluded. We thank you all for attending today’s presentation. At this time, you may disconnect your lines. Thank you and have a good day everyone.