SAN DIEGO, Oct. 28 /PRNewswire-FirstCall/ -- Novatel Wireless, Inc. (Nasdaq: NVTL), a leading provider of wireless broadband access solutions, today reported financial results for the third quarter ended Sept. 30, 2010.  

"Our revenue showed modest growth of 5.3 percent compared to the sequential second quarter of 2010," said Peter Leparulo, chairman and CEO of Novatel Wireless. "In the fourth quarter, we expect revenues to increase by more than 45 percent sequentially based on the fast growing backlog for our current MiFi® Intelligent Mobile Hotspot product family.

"During the fourth quarter, we also expect to begin launching next-generation products and our first MiFi OS software platform as we continue to roll out integrated hardware/software solutions that we believe will increase our product differentiation. Additionally, we have had a number of important design wins and expect embedded products to return to growth in 2011, as new OEM customers launch platforms with next-generation wireless access -- enabled by our 4G embedded modules. Looking forward, we will continue to focus on diversifying our revenue and customer base, introducing innovative products with higher software content, and growing our addressable market."

Operating Results

Third quarter revenues were within our guidance range of $75 to $80 million. While unit volumes for core products and MiFi intelligent mobile hotspots were at all-time highs, average selling prices were lower as mature 3G products continue to experience significant pricing pressures.

Gross margins of 17.4 percent were below our expectations primarily due to a variance in our product mix, with a higher than anticipated percentage of lower margin products. Margins were also affected by industry-wide freight cost increases.

"We continued to maintain disciplined control over operating expenses as we scale to meet demand and introduce new products," said CFO Ken Leddon. "Operating expenses were $19.6 million, compared to $22.5 million in the prior year period, and $21.6 million in the second quarter of 2010."

Tax Adjustment

During the second quarter of 2010, the company recorded a valuation allowance of $15.5 million against the book value of deferred tax assets generated prior to 2010. During the third quarter of 2010, we determined that the valuation allowance recorded during the second quarter included an over-accrual of $0.8 million attributable to deferred tax assets previously reserved.  We have also determined that there were certain other uncertain tax liabilities that were over accrued by a cumulative amount of $0.5 million as of December 31, 2009, which had accumulated over a number of years.  We have analyzed the potential impact of these items and concluded that while the accumulation of these two errors was significant to the three months ended September 30, 2010, their correction would not be material to any individual periods.  As a result we have recorded $0.5 million as an adjustment to the three and nine months ended September 30, 2010 while the correction of the $0.8 million error is included as an adjustment to the nine months ended September 30, 2010, as provided by the applicable accounting literature.

Both of these tax benefit adjustments have been excluded from non-GAAP results.

EPS Summary

GAAP loss per share was $0.22, compared to our previous guidance of $0.23 to $0.26. On a non-GAAP basis, the loss was $0.14 per share, compared to our previous guidance of $0.10 to $0.13 per share.

Recent Business Highlights

• Verizon Wireless and Apple announced that the iPad will be available at over 2,000 Verizon Wireless Stores nationwide beginning October 28. Verizon Wireless is offering three bundles, all featuring an iPad Wi-Fi model and the Novatel Wireless MiFi 2200 Intelligent Mobile Hotspot.
• Novatel Wireless announced the continued evolution of its USB product line with the launch of the Ovation™ MC545 to support operators rolling out Dual-Carrier HSPA+ (DC-HSPA+) networks. At a press event in Madrid, Telefonica Moviles showcased the Ovation MC545's over-the-air download speed of 40.5 megabits per second supported by Ericsson's DC-HSPA+ network infrastructure. The Ovation MC545 modem is the world's most compact and light-weight DC-HSPA+ USB modem in the market place.
• Virgin Mobile introduced new prepaid pricing plans that will provide access on the Sprint nationwide broadband network without a contract. Virgin Mobile offers two different mobile broadband devices as part of the Broadband2Go portfolio: the Novatel Wireless Ovation™ MC760 USB device; and the MiFi 2200, the nation's first prepaid Mobile Intelligent Hotspot.
• Novatel Wireless demonstrated the MiFi 2372 Intelligent Mobile Hotspot at CTIA Enterprise and Applications trade show in San Francisco. The MiFi 2372 was pre-loaded with the new MiFi OS and applications aiming to help businesses benefit from secure mobile broadband and providing access to information and resources anytime, anyplace.
• Novatel Wireless announced the readiness of its 4G portfolio for next-generation technology. Novatel Wireless provides a full portfolio of mobile broadband solutions to supply its carrier and OEM customers with leading consumer and business connectivity solutions as carriers deploy new wireless networks or evolve their existing networks to 4G.
• KDDI Corporation in Japan began offering the MiFi 2372 as a rental service for Japanese consumers and business travelers who want to stay connected when traveling overseas. The service offers wireless rental data plans without long-term contracts for business and leisure travelers with international carriers in 23 countries.

Fourth Quarter 2010 Business Outlook

The following statements are forward-looking and actual results may differ materially.  Please see the section titled, "Cautionary Note Regarding Forward-Looking Statements" at the end of this press release.  A more detailed description of risks related to our business is included in the reports filed by the company with the Securities and Exchange Commission.

The following summarizes the company's financial guidance for the fourth quarter of 2010, which is based on our current business outlook as of the date of this press release.

Conference Call Information

Novatel Wireless will host a conference call and live webcast for analysts and investors today at 5:00 p.m. ET.  For parties in the United States and Canada, call 877-941-2068 to access the conference call. International parties can access the call at 480-629-9712.

Novatel Wireless will offer a live webcast of the conference call, which will also include forward-looking information. The webcast will be accessible from the "Investor Relations" section of the Company's website at www.novatelwireless.com. The webcast will be archived for a period of 90 days. A telephonic replay of the conference call will also be available two hours after the call and will run for two days. To hear the replay, parties in the United States and Canada should call 800-406-7325 and enter pass code 4361768.  International parties should call 303-590-3030.

ABOUT NOVATEL WIRELESS

Novatel Wireless, Inc. is a leader in the design and development of innovative wireless broadband access solutions based on 3G and 4G wireless technologies.  Novatel Wireless' Intelligent Mobile Hotspot products, software, USB modems and embedded modules enable high-speed wireless Internet access on leading wireless data networks. The Company delivers specialized wireless solutions to carriers, distributors, OEMs and vertical markets worldwide. Headquartered in San Diego, California, Novatel Wireless is listed on NASDAQ: NVTL. For more information please visit www.novatelwireless.com. (NVTLG)

Cautionary Note Regarding Forward-Looking Statements

Some of the information presented in this release constitutes forward-looking statements based on management's current expectations, assumptions, estimates and projections.  In this context, forward-looking statements often address expected future business and financial performance and often contain words such as "may," "estimate," "anticipate," "believe," "expect," "intend," "plan," "project," "will" and similar words and phrases indicating future results.  The information presented in this release related to our outlook for the fourth quarter of 2010 and statements regarding the future performance of our products are forward-looking.  Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in such forward-looking statements.  The Company therefore cannot guarantee future results, performance or achievements.  Actual results could differ materially from the Company's expectations.

Factors that could cause actual results to differ materially from Novatel Wireless' expectations are set forth as risk factors in the Company's SEC reports and filings and include (1) the future demand for wireless broadband access to data, (2) the growth of wireless wide-area networking, (3) changes in commercially adopted wireless transmission standards and technologies including 3G and 4G standards, (4) continued customer and end user acceptance of the Company's current products and market demand for the Company's anticipated new product offerings, (5) increased competition and pricing pressure from current or new wireless market participants, (6) dependence on third party manufacturers in Asia and key component suppliers worldwide, (7) unexpected liabilities or expenses, (8) the Company's ability to introduce new products in a timely manner, (9) litigation, regulatory and IP developments related to our products or component parts of our products, (10) the outcome of pending or future litigation, including the current class action securities litigation, (11) the continuing impact of the recent global credit crisis on the value and liquidity of the securities in our investment portfolio, (12) dependence on a small number of customers, (13) the effect of changes in accounting standards and in aspects of our critical accounting policies and (14) the Company's plans and expectations relating to strategic relationships, international expansion, software and hardware developments, personnel matters and cost containment initiatives.

These factors, as well as other factors described in the reports filed by the Company with the SEC (available at www.sec.gov), could cause actual results to differ materially. Novatel Wireless assumes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future, except as otherwise required pursuant to applicable law and our on-going reporting obligations under the Securities Exchange Act of 1934, as amended.

Non-GAAP Financial Measures

Novatel Wireless has provided in this release financial information that has not been prepared in accordance with GAAP. Non-GAAP operating expenses, net income and earnings per share exclude stock-based compensation expenses and charges related to M&A activities. Non-GAAP net income and diluted earnings per share also exclude the impact of establishing a valuation allowance related to deferred tax assets and assume a tax rate which management believes reflects its long-term effective tax rate.

Non-GAAP net income, diluted earnings per share, operating expenses, and gross margin are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. These non-GAAP financial measures are not intended to be used in isolation and, moreover, they should not be considered as a substitute for net income, diluted earnings per share, operating expenses, gross margin or any other performance measure determined in accordance with GAAP. We present non-GAAP net income, diluted earnings per share, operating expenses, and gross margin because we consider each to be an important supplemental measure of our performance.

Management uses these non-GAAP financial measures to make operational decisions, evaluate the Company's performance, prepare forecasts and determine compensation. Further, management believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the Company's performance when planning, forecasting and analyzing future periods.  The stock-based compensation expenses are expected to vary depending on the number of new grants issued to both current and new employees, and changes in the Company's stock price, stock market volatility, expected option life and risk-free interest rates, all of which are difficult to estimate. In calculating non-GAAP operating expenses, net income and diluted earnings per share, management excludes stock-based compensation expenses and charges related to M&A activity to facilitate comparability of the Company's operating performance on a period-to-period basis because such expenses are not, in management's review, related to the Company's ongoing operating performance. Management uses this view of its operating performance for purposes of comparison with its business plan and individual operating budgets and allocation of resources.

We further believe that these non-GAAP financial measures are useful to investors in providing greater transparency to the information used by management in its operational decision making.  We believe that the use of non-GAAP operating expenses, net income and diluted earnings per share also facilitates a comparison of Novatel Wireless' underlying operating performance with that of other companies in our industry, which use similar non-GAAP financial measures to supplement their GAAP results.

Calculating non-GAAP operating expenses, net income and diluted earnings per share have limitations as an analytical tool, and you should not consider these measures in isolation or as substitutes for GAAP operating expenses, net income and diluted earnings per share. In the future, we expect to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items in the presentation of our non-GAAP financial measures should not be construed as an inference that these costs are unusual, infrequent or non-recurring. Investors and potential investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Some of the limitations in relying on non-GAAP operating expenses, net income and diluted earnings per share are:

• Other companies, including other companies in our industry, may calculate non-GAAP operating expenses, net income and diluted earnings per share differently than we do, limiting their usefulness as a comparative tool.  

• The Company's income tax expense will be ultimately based on its GAAP taxable income and actual tax rates in effect, which may differ significantly from the effective tax rate used in our non-GAAP financial measures.

In addition, the adjustments to our GAAP operating expenses, net income and diluted earnings per share reflect the exclusion of stock-based compensation expenses that are recurring and will be reflected in the Company's financial results for the foreseeable future. The Company compensates for these limitations by providing specific information regarding the GAAP amount excluded from the non-GAAP financial measures. The Company further compensates for the limitations of our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently. The Company evaluates the non-GAAP financial measures together with the most directly comparable GAAP financial measures.

Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with our GAAP operating expenses, net income, diluted earnings per share and gross margin. For more information, see the consolidated statements of operations and the "Reconciliation of GAAP Net Income (Loss) to Non-GAAP Net Income" contained in this press release.

(C) 2010 Novatel Wireless. All rights reserved. MiFi is a registered trademark of Novatel Wireless, Inc. The Novatel Wireless name and logo are trademarks of Novatel Wireless, Inc. Other product or service names mentioned herein are the trademarks of their respective owners.

SOURCE Novatel Wireless, Inc.