Novatel to Gain from High Broadband and Telematics Demand

On Sep 9, 2014, we issued an updated research report on Novatel Wireless Inc. (NVTL).

Novatel has delivered a positive earnings surprise in just one quarter last year, with an average beat of 10.72%. Meanwhile, the company reported dismal financial results for the second quarter of 2014 as both the top and the bottom line witnessed a steep year-over-year fall.

Increased demand for mobile broadband will help spur growth at Novatel going forward. The company currently serves three large wireless operators in the U.S., namely, Verizon Communication Inc. (VZ), AT&T Inc. (T) and Sprint Corp. (S). Moreover, cost-saving initiatives like downsizing workforce and cutting operating expenses are expected to boost margins.

Novatel also 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. Novatel also intends to deliver MT 4100 to another fleet management firm, AirIQ. Meanwhile, the company 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 latter’s VTS Silent Passenger application.

Internationally, MT 4100 has gained popularity considerable in Europe and Novatel has teamed up with Simple Solutions to capitalize on this. In China, the government plans to use MT 4100 to track government fleets. Hence, landing deals with the two top telematics service providers will certainly drive Novatel’s Commercial telematics business.

However, we anticipate increasing competition for Novatel’s MiFi product line as several of the latest smartphone versions boast inbuilt WiFi. To aggravate matters, low-cost Asian manufacturers, including ZTE and Huawei Technologies, have launched their version of intelligent mobile hot spots, intensifying the competitive pressure on Novatel. Weighing these negatives, the company provided a weak outlook for the second quarter of 2014.

Apart from the afore-mentioned challenges, Novatel’s business depends on a limited number of customers, who represent a significant portion of the company’s total revenue. Thus, loss of any of these customers will adversely affect the company’s business model. Moreover, Novatel’s business lacks geographical diversification as North America alone accounts for nearly 97% of its total revenue.

Novatel currently carries a Zacks Rank #3 (Hold).