Updated Research Report On Novatel - Analyst Blog

On Jun 13, 2014, we issued an updated research report on Novatel Wireless Inc. NVTL. Increased competition and higher operating expenses have resulted in a dismal first-quarter 2014 performance.

Novatel has delivered negative earnings surprises in two quarters last year, with an average miss of 5.36%. The company reported poor financial results for the first quarter of fiscal 2014 as the bottom line was in line with the Zacks Consensus Estimate while the top line missed the same.

Increased demand for mobile broadband will help Novatel going forward. The company currently serves the three large wireless operators in the U.S., namely, Verizon Communication Inc. VZ, AT&T Inc. T and Sprint Corp. S. Notably, Verizon has launched MiFi 4620 LE with an extended battery pack. Moreover, cost saving initiatives like downsizing workforce and cutting operating expenses are expected to boost margins.

Recently, Novatel announced its plans to supply MT 4100 devices to FleetMatics from the second quarter of 2014. FLeetMatics provides vehicle management solutions to nearly 22,000 customers with over 445,000 subscribed fleets worldwide. Moreover, the company intends to deliver MT 4100 to another fleet management firm, AirIQ. Novatel also entered into an agreement with Vehicle Tracking Systems (VTS), a popular fleet management system operator, to supply MT 4100 and MT 3050 devices to support the VTS Silent Passenger application.

Outside the U.S., MT 4100 is also gaining popularity. In Europe, the company has teamed up with Simple Solutions while the Chinese government will use it for tracking government fleets. Hence, striking deals with two top telematics service providers will certainly drive Novatel's commercial telematics business.

However, we anticipate increasing competition for Novatel's MiFi product line. Several latest versions of smartphones have inbuilt WiFi capability. Low-cost Asian manufacturers, including ZTE and Huawei Technologies, have already launched their own version of intelligent mobile hot spots creating competitive pressure on Novatel. As a result, the company provided a weak outlook for the second quarter of 2014.

Novatel's business depends on a limited number of customers, who represent a significant portion of the company's total revenues. Loss of any of these customers will adversely affect the company's business model. Moreover, the company's business is less diversified geographically as North America alone accounts for nearly 97% of its total revenue.

Novatel currently carries a Zacks Rank #4 (Sell).