Alex Mashinsky - Interim CEO Slim Souissi - President and COO Tom Allen - Interim CFO.

Bryan Prohm - Cowen and Company.

Good day and welcome to the Novatel Wireless Incorporated Second Quarter 2014 Earnings Conference Call. Please note this event is being recorded. On the call today are Interim Chief Executive Officer, Alex Mashinsky; President and Chief Operating Officer, Slim Souissi; and Interim Chief Financial Officer, Tom Allen.

As a reminder, this conference call is being broadcast on Wednesday August 6, 2014 over the phone and Internet to all interested parties. Information shared in this call is effective as of today's date and will not be updated. During this call, non-GAAP financial measures will be discussed.

A reconciliation to the most directly comparable GAAP financial measures is included in the earnings release, which is available on the Investors section of the company's website. An 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 Forms 10-K, 10-Q and other SEC filings which are available on our website. All participants will be in listen-only mode. (Operator Instructions).

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Now I would now like to turn the call over to Alex Mashinsky, Interim Chief Executive Officer of Novatel Wireless. Please go ahead..

Thanks Andrew and thanks everyone for joining us on today’s call. Since taking the role of Interim CEO here at Novatel Wireless approximately eight weeks ago I have learned a lot and continue to learn everyday I am here. There is very impressive technology and talent at this company. I am excited to help lead the company through this transition period.

First a bit about myself; I have been involved in the wireless communication space for several decades, starting several innovative companies such as GroundLink, Transit Wireless, Elematics and Arbinet. While building these companies I have built world class teams and won in large markets through differentiated strategies.

As you may know the Board of Directors is actively engaged in the search for a full time CEO. However I want to ensure the investment community that I am committed to staying with Novatel through this transition period and plan on taking direct action in the near-term to help unlock the potential that I see here. I am not here as a babysitter.

Novatel Wireless has best in class products, routinely deploying first generation technologies from companies like Qualcomm and Verizon. The challenge today as I see it is that Novatel Wireless is customer concentration and has margins that are below industry average.

We have maintained a distinction between the mobile computing and M2M businesses in a world rapidly moving towards the Internet of Things. Since my arrival we have started integrating M2M and mobile computing and from now on we will be calling them IoT. We are currently shipping three products that combine our MiFi and M2M technologies.

Historically, the company has not leveraged its MiFi brand, a leading edge technology to create IoT solutions outside of traditional channels. We have an existing base of 17 IoT products and over 80 global customers with solution of virtually every identified IoT growth segment.

We continue to be the only approved supplier of mobile computing products to the top three North American carriers. Now I'll provide an update on the MiFi and M2M segments results from the second quarter.

Beginning with MiFi, revenues for the quarter were $27.5 million, which was at the low end of our guidance, due to lingering component shortages that created an inability to fulfill demand early in the quarter; we have since solved this problem.

Our first carrier aggregation product has obtained all regulatory approvals and is in the final stage of the carrier certification. Pilot production has started in the third quarter. A derivative of the carrier aggregation product has been selected by another tier 1 carrier for launch in early 2015.

We continue to bid our carrier aggregation solutions to other carriers worldwide. Our MiFi 5510 continues to ship in volume and we expect shipments through the end of this year in both direct and indirect channels. MiFi added six new customer wins this quarter and we continue to aggressively market it worldwide.

We're currently bidding our MiFi home product to several tier 1 carriers. We're expanding our MiFi product line with product extensions in new vertical markets. Turning to M2M. Revenue in the second quarter was $9.8 million, which was slightly below the low end of our guidance.

The main reason was the combination of production issues for newly introduced UBI product and delayed order from several key customers. M2M currently has 25 product evaluations underway with various customers. We have over 30 M2M products of which 14 are still in development.

Multiple of our M2M solutions were selected to participate in key telematics vertical trials worldwide. We are now a primary supplier of three of our Tier 1 customers displacing key competitors. We started ramping sales of our flagship MT 3060 UBI solution, for the first time our UBI sales exceeded 10% of our M2M revenues.

Q3 UBI backlog has already exceeded 25% of forecasted Q3 sales and will be a key product offering as we complete the integration on the MT 3060 solution into major customer service platform. At the end of our second quarter, we had a total of 180,000 devices under management, up from a 123,000 in Q1.

More than 60% of the subscribers are paying licenses. Our direct sales approach provides greater visibility into our customers’ roadmaps and service needs and it is also positioning us for participating in larger opportunities. We had about 64% of our M2M sales go direct to enterprise customers during Q2.

We continued to experience below industry average M2M margins due to several products containing a large legacy 2G chipset. We expect to transition to a low cost chipset by Q1 of 2015. We expect to sequentially improve our margins through the first half of 2015.

Most orders received since the first quarter have been on products with a higher gross margin than our average in Q1.

[Due to] [ph] significant changes in our senior executive management team, the ongoing restructuring effort and the development of the company's new strategies including further integration of our MiFi and M2M product lines, the company is suspending the providing of forward quarterly guidance until it has better visibility of projected results.

And with that, I'll now turn the call over to Tom for a discussion of our financial results..

Thank you, Alex. And I guess following Alex's lead, I'll give you a little bit of my background since I arrived Monday, following Friday's arrival of Alex. So we both kind of landed here at Novatel at the same time.

I’ve had 15 plus years of public company CFO experience most recently as the CFO and Chief Operating Officer of the Outdoor Channel Holdings Company here in Southern California. It's an exciting environment here and I am pretty impressed with the people that I am surrounded by especially at the second level.

Obviously there's been lot of changes at the senior level. If you’ve had a chance to look at our earnings release this afternoon, you will no doubt have noticed that we had a lot of noise in our numbers and we'll get to that noise in a second.

But as a general note, given the significant restructuring activities commenced by the company last fall, my focus will be primarily based on the comparison of our Q2 results against our Q1, 2014 results as opposed to the year ago quarter of 2013. Obviously that's a more relevant comparison.

For the second quarter, our net revenues were $37.3 million with $27.5 million coming from our mobile computing segment and $9.8 million coming from our M2M segment. This represented a 23% decline from the first quarter of 2014.

On a segment basis, our mobile computing revenue which was substantially generated from the sale of our MiFi products declined 24% over Q1 due to the continued aging of our current product offerings and to a lesser extent, due to the component shortages that Alex referenced earlier in his portion of the conversation here.

And that by the way bridged the back half of the first quarter and the first part of the second quarter so I know the sounds like a familiar theme here, but it was really a single event that bridged two quarters.

Our M2M products and solutions revenue totaled 9.8 million and they were down 5% from a year ago’s quarter but down 19% sequentially compared to the first quarter of this year.

The decline in these revenues compared to the first quarter was due to the reason that Alex provided, plus a higher volume in Q1 of last time buy orders on products approaching the end of their life.

From a geographic perspective, sales in North America accounted for 88% of our total revenue versus 92% in the first quarter of 2014 reflecting what we believe in part represents an improving international sales effort.

Our GAAP operating loss for the quarter was 17.4 million, which included 5.3 million in additional restructuring costs, which primarily consisted of approximately 3.7 million in severance costs related to the June termination of our former CEO.

That CEO termination costs figure includes 1.3 million related to the accelerated vesting of then unvested options and RSUs and the balance 2.4 million was the cash component of that provision.

Also included in the restructuring charges for Q2 are approximately 900,000 related to changes in our estimates for the exit of our previously announced Calgary impartial office space here in our San Diego building due to a softer sublet market than we originally estimated in both instances, and approximately 600,000 related to another smaller risk at the end of June involving our remaining Canada based employee group.

Another significant charge affecting both our gross profit and our operating and net loss for the quarter was a 2.9 million aggregate write-down of our inventory across both segments. This alone affected our margin by almost 8%.

Also adversely affecting our gross profit margin was the sale of approximately 2 million of older products across both segments at essentially little to no margin as we try to clean up inventory.

Other non-cash charges included in our quarterly results were share based compensation expense which excluding the aforementioned 1.3 million related to our former CEO was 762,000 for the quarter compared to 477,000 the prior quarter and 1.9 million of depreciation and amortization including 224,000 in amortizations of intangibles.

Our adjusted EBITDA which as a reminder excludes restructuring charges, stock based comp and D&A was negative 9.5 million for the quarter compared to negative adjusted 5.2 million for the first quarter of 2014.

The increase in our negative EBITDA for the quarter was primarily driven by lower revenues and margins and latter primarily the result of the aforementioned inventory reserves net of savings and cash based operating expenses.

And speaking of cash based operating expenses they total 15.2 million in the quarter down 2 million from the prior quarter and down 10.6 million from the same quarter a year ago. The continued reduction of our OpEx expenses for both comparative periods has been driven primarily by our restructuring efforts which we initiated in September of 2013.

We implemented further restructuring initiatives in the second quarter and into the early part of the third quarter, that latter piece being the listing of additional office space here in the San Diego office.

Looking at cash based operating expense, by category, R&D expenses were $8.3 million compared to $8.6 million as headcount and related salary cuts in the first quarter were largely offset by increased test and certification expenses in the second quarter related to the launch of our next MiFi product later this year.

Sales and marketing expenses were $2.9 million, compared to $3.9 million in the prior quarter, most of them lower comp cost and our G&A expenses were $4.0 million versus $4.7 million in the prior quarter, lower on compensation and legal expenses. Our non-GAAP net loss in the second quarter was $11.2 million or $0.33 per share.

Weighted average shares for the quarter were $34.3 million. Turning to the balance sheet, we closed the quarter with cash and marketable securities of 22.4 million, a decrease of 5.5 million compared to the 27.9 million of cash and marketable securities at March 31, 2014.

And this decrease was primarily due obviously to our negative adjusted EBITDA partially offset by positive changes in our working capital. Accounts receivable at end of the quarter was 26 million, just under 26 million, down from approximately $30 million at last quarters.

And inventory was 26 million up slightly from 25 million at March 31, despite our significant inventory reserve taken, as we finally solved our component shortage problems that rose at the back half of Q1 and returned to normal stock levels of key MiFi products. And our second quarter CapEx was $728,000. A few notes on recent cash activity.

During July we paid approximately $4.3 million in cash in connection with the shareholder litigation settlement that was previously announced and court approved on June 20, 2014.

We also paid the remainder of our 2013 bonuses and an important note there, none of the executive, senior executive team were recipient of any of those bonus, that was really to the manager level and below team.

And while we believe we have adequate liquidity to meet our needs over the coming 12 months, we’re in discussions with several lenders in an effort to secure more financial flexibility for the company via senior asset base revolving credit facility. And we hope to have that or other financing in place by the end of the third quarter or early fourth.

Just as a final note and this relates to shares outstanding, on July 17th, also in connection with the shareholder litigation settlement that was approved on June 20th, we issued an additional 2.4 million shares to the [pointers], so you’ll see a bump in our outstanding shares here in the third quarter when we report that information.

And with that operator, we’ll now be happy to take questions from the participants on today’s call. .

We will now begin the question-and-answer session. (Operator Instructions). We do have a question from Bryan Prohm of Cowen and Company. Please go ahead..

Hey. Good afternoon, Alex and Tom.

How are you?.

Good, thanks..

Thanks for taking my questions. So I get the lack of forward guidance for September given all that’s transpired over the past three months. So, let’s just touch on a couple of things. Tom, you already kind of touched on my cash question, so I’ll move into the product side.

The inventory cleanup, is that largely done? It sounds like it impacted both product lines and some 2G modules in the M2M business but that's no longer a headwind and then some more legacy MiFi products?.

I think we're pretty comfortable where we ended up at the end of June. Clearly you have to make assumptions about forward sales to arrive at what the right number is to reserve.

And we obviously -- we're leaning towards being on the conservative side of middle in terms of those views given some uncertainty about some of the product that's moving towards the end of life stage but I think we're comfortable with where we ended up..

So, it's Alex here. We had several sales of products that we didn't think we should keep in our inventory and those were down at lower margin. These were all discontinued products or end of life products both on the module side and on the MiFi side.

So, we're focusing all of our efforts on obviously future development and then I didn't think we should keep inventory of products that we don't need..

Totally understand.

So, help me then get a better sense of where the MiFi roadmap is headed between now and the end of the year? I know you guys have had an LTE product cycle coming or VoLTE product cycle coming, is that largely expected to be or is that expected to be the majority of sales by year-end, what's the inflection point where we’re more than 50% or more fully into the new product cycle on MiFi?.

So, we’re in transition, obviously we’re currently selling the 5510 and we're transitioning it to a new carrier aggregation product. That product just went through all necessary approvals; it went through LTE conformance testing and we are just waiting for it to basically be deployed by tier 1 customers.

So if you think of it -- there is hand off between the 5510 and the new product. And because again, we just started here, I wanted to make sure when this hand off takes place and that's why we wanted to make sure we've provided guidance when we know when that happens and we know what volumes are and so on.

But the new product we’re talking about is - the new MiFi product has some of the fastest speeds in the industry, it has one of the longest battery life, I mean it’s best of breed on almost all categories. So we're very proud of it. And I think when it hits the market, there is going to be a lot of demand for this product..

Great.

One clarification question, you alluded to 180,000 assets under management up from 123 in 1Q, did I get that correct?.

Yes, that's correct. Yes..

Is that the kind of sequential growth, we should be looking for, if we choose to model M2M that way or is it more of -- how should we think about that? Thanks..

So Bryan, this is Slim. So if you look at the larger actually number of activations that happened in Q2, a lot of it relates to Novatel Wireless entering the UBI business and starting to ship UBI products in Q1 and Q2, so a lot of the activations relate to our cloud solution tied to the UBI platforms.

Alex mentioned that UBI sales represented about 10%, more than 10% of our revenue in Q2, we expect that to double in Q3 and this cloud platform also ties into the majority of other M2M product. So I would expect maybe to see activations on the software side in line with what we have disclosed this quarter from an absolute number standpoint..

Great, thanks.

And then tell me little bit about the international sales efforts, it’s a question that I have always had for Novatel with some of these leading edge technology products wise and their more demand outside the Tier 1 carriers in the United States, but it sounds like you have already pushed a little bit on the revenue diversification there from 92 to 88 in the quarter? Thanks..

Yes so Alex here again. So the MiFi used to sell worldwide right and currently we really are only selling it I think in North America. We have plenty of other opportunities but we are going to push through that with product expansions and new verticals.

So it’s going to take a little bit of time but I think you are going to start seeing growth of that product on a global scale.

Most of the numbers that we reported and most of the growth there came from actually our M2M products as those are currently both certified and are sold in different continents, right, I mean almost everywhere and we are adding more use cases or more implementations, more integrations every day.

These things just take time but when they deployed, they deploy in the Middle East, they deploy in Europe, they deploy in South America. So, it's really a global offering. So, we expect again more diversification and more growth on international side.

And we expect our Tier 1 customers to continue growing, but represent less and less as a percentage of our total revenues..

Understood. Last question from me and then I'll pass it off. Can you quantify the revenue impact of supply constraints on MiFi sales.

Was it similar to 1Q, I think there was about $5 million, if I remember right?.

Yes. It may not have been quite that high in the second quarter maybe $2 million to $3 million, I think is the estimated number..

Okay.

But that would put you in the midpoint of guidance though?.

Yes. .

Understood, alright. Thanks for the time gentlemen and good luck. Talk to you soon..

Thanks..

And at this time, I would like to turn the conference back over to Alex Mashinsky for his closing remarks..

I want to thank everybody for joining the call and we look forward to hearing from all of you on the next call. Thank you very much. .

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