Buy Novatel: MiFi is Gradually Transforming to IoT SaaS Provider

Summary

In Q2 2016, MiFI posted a revenue of $62.81 million, which is 21.56% higher than the same quarter last year

In Q2 2016, MiFI’s gross margin widened from 26.76% to 35.44% compared to Q2 2015

MiFi still lost money in Q2, but their net loss came out at only $2.7 million, which is a huge improvement compared to net loss of $9.22 million in Q2 2015

CEO accepted that there is more to be done to transform MiFI into an IoT SaaS provider

We recommend that long term investors increase their exposure once the stock price of MiFi settles around $2.8 to $2.9 per share

Company Overview

Novatel Wireless Inc (NASDAQ:MIFI) is primarily involved in the mobile communications business with an extensive focus on the Internet of Things (IoT) market. As an intelligent wireless solutions provider, Novatel Wireless Inc offers a range of networking products, including mobile hotspots, universal serial bus (USB) modems, embedded modules, integrated asset-management and mobile tracking machine-to-machine (M2M) devices.

Novatel Wireless Inc is also involved in offering cloud based services, such as software-as-a-service (SaaS) solutions for the fleet telematics market.

Novatel Wireless Inc mainly operates in two segments, their first focus is on the evolving machine-to-machine (M2M) products and service that includes developing integrated M2M communications devices. Secondly, they are involved in mobile computing solutions, where they have a strong market presence with their MiFi brand of mobile hotspots, USB modems, and other embedded modules for mobile Internet and data transmission services over cellular networks.

As of August 23, 2016, Novatel Wireless Inc had a market capitalization of $165 million and employed around 1,330 people run its global operations.

Review of Q2 2016 Financial Results

01_revenue

Figure 1: Novatel Wireless Inc’s Q2 Revenue Came Out at $62.81 Million

On August 3, 2016, Novatel Wireless Inc released its Q2 2016 financial result, which showed that the company has generated $62.81 million in revenue. Compared to Q2 2015’s $51.67 million revenue, this year’s revenue increased by around 21.56%. However, compared to Q1 2016, the Q2 revenue decreased by around 6.17%.

Although Novatel Wireless Inc reported a net loss of $2.70 million, compared to the $9.22 million net loss in Q2 2015, it was perceived as a huge improvement, which almost pushed the company near breakeven.

The reduction in loss, despite a drop in revenue compared to the previous period, happened primarily because of a widening gross profit margin, which widened from 26.76% to 35.44% compared to the same period last year.

02_price

Figure 2: Novatel Wireless Inc’s Stock Price Has Gone Up by 99% Since Releasing Q2 Earnings

As a result, since August 3, the stock price of Novatel Wireless Inc has gone up to $3.8 per share on, representing a 99% increase since the publication of Q2 financial results. Currently, the stock has retraced back to $3.13 per share, but still representing a 63.28% increase compared to the closing price on August 2, which was around $1.91 per share.

Takeaway from the Earnings Call

During the Q2 earnings call, the Chief Executive Officer of Novatel Wireless Inc, Sue Swenson, gladly accepted that while “there is obviously still work to be done,” she is “very pleased with the changes” they have made over the last quarter.

One of the key metrics, the adjusted EBITDA has “improved by $4 billion to positive $1.7 million,” she said. Secondly, as we mentioned earlier, Sue Swenson, also pointed to the fact that “non-GAAP gross margin has improved to 37.9% from 30.9%.”

However, she shared something else that we believe played a vital role in the recent surge in Novatel Wireless Inc’s stock price, the number three in her list, subscribers-base has increased to 557,000 via the acquisition of Ctrack and FW.

Since taking over the role of CEO, Sue Swenson, seems to have focused on maximizing the revenue and profit from well performing business units and either sell or streamline the other areas that did not fit their “vision of being a leading player in IoT SaaS services and solutions.”

Conclusion

The transformation from being the MiFi brand to a IoT SaaS provider is a long way down the road, but investors seem to be going on board as progress is being made to achieve that goal.

For example, the CEO claimed that “more than 25% for Q4 ’16 revenues from Verizon will be driven by non-hotspot products highlighting the diversity efforts already underway.”

We believe the management is on track to transform this company and if you already own shares of Novatel Wireless Inc, it would be beneficial to increase your exposure.

However, prior to releasing the Q2 2016 financial result, Novatel Wireless Inc had an average price target of $2.83, and based on the current market price of $3.13, the stock is trading above this target price by a 9.59% margin. Also, the recent rally is already in a retracement, which may push the price towards the average price target soon. Hence, we strongly recommend that long term investors consider increasing their exposure in Novatel Wireless Inc once the stock price trades settle around $2.8 to $2.9 per share.