Novatel Wireless Reports Third Quarter 2016 Financial Results

Novatel Wireless, Inc. (NASDAQ: MIFI), a leading provider of solutions for the Internet of Things ("IoT"), including software-as-a-service ("SaaS") solutions for the fleet telematics market, announced financial results for the third quarter ended September 30, 2016.

"Novatel Wireless has been on an incredible journey over the past 12 months. With the pending sale of our MiFi business expected to close in the first quarter of 2017, the Company's transformation into a provider of comprehensive IoT solutions is nearly complete. We now have approximately 590,000 subscribers to the Company's high-margin SaaS, software and services offerings, with 20% annualized growth in subscribers to the Company's Ctrack fleet management telematics solutions during the third quarter," said Sue Swenson, Chair and CEO of Novatel Wireless. "With another record quarter for SaaS, software and services revenues driving the Company to a fourth consecutive quarter of improved adjusted EBITDA, I look forward to a brighter future as we move beyond our hardware roots and emerge as a pure-play IoT solutions provider."

Third Quarter 2016 Financial Highlights

The Company announced the following U.S. GAAP ("GAAP") financial results for the third quarter of 2016:
  • Revenue increased by 12.2% to $60.9 million in the third quarter of 2016, compared to $54.3 million in the third quarter of 2015.
  • Revenue from SaaS, software and services increased to $14.8 million in the third quarter of 2016, from $2.2 million in the third quarter of 2015, as the Company continued its focus on IoT SaaS and services solutions, including the Ctrack® telematics solutions ("Ctrack") that the Company acquired in the fourth quarter of 2015. Revenue from SaaS, software and services increased to a record 24.3% of the Company's total revenue in the third quarter of 2016, compared to 4.1% of total revenue in the third quarter of 2015.
  • Revenue from hardware products was $46.1 million in the third quarter of 2016, a decrease of 11.3% from $52.0 million in the third quarter of 2015, as the Company continues to strategically de-emphasize lower margin hardware-only sales in favor of bundled solutions that include higher-margin SaaS, software and services offerings.
  • Revenue from Ctrack products, which include a mix of hardware and SaaS, software and services sold as a bundled telematics solution, was $16.6 million in the third quarter of 2016.
  • Net loss was ($18.6 million), or ($0.34) per share, in the third quarter of 2016, compared to a net loss of ($20.8 million), or ($0.38) per share, in the third quarter of 2015. Net loss in the third quarter of 2016 includes a $2.8 million legal settlement entered into by the Company in September 2016 in connection with a breach of contract claim related to the Company's hardware products, a $2.4 million reduction in the gain recognized in the second quarter associated with the Company's divestiture of certain hardware modules and related assets in April 2016, $2.6 million of impairment charges primarily related to certain developed technologies acquired with Feeney Wireless ("FW") in March 2015, and $3.3 million of other charges related to the Company's acquisition and divestiture activities.
  • As of September 30, 2016, the Company had cash and cash equivalents of $17.2 million, with no amounts drawn down on its revolving credit facility with Wells Fargo Bank.

The Company also announced the following non-GAAP financial results for the third quarter of 2016. A reconciliation of these non-GAAP financial measures to the Company's GAAP financial results is included in the tables accompanying this news release:
  • Non-GAAP gross profit increased by 56.7% to $23.5 million in the third quarter of 2016, from $15.0 million in the third quarter of 2015, driven by a combination of increased total revenues and the contribution from the Company's Ctrack and FW-branded SaaS, software and services revenues. Ctrack and FW were both acquired by the Company during 2015. Overall non-GAAP gross margin increased to a record 38.7% in the third quarter of 2016, compared to 27.7% in the third quarter of 2015, as the Company continued its transition toward an improved mix of higher-margin IoT solutions with significant SaaS and recurring revenue components.
  • Non-GAAP gross margin on SaaS, software and services was 67.3% in the third quarter of 2016, compared sequentially to 74.2% in the second quarter of 2016, primarily driven by revenues from high-margin SaaS and software solutions delivered by Ctrack and FW, partially offset by increased revenues from larger telematics customers. SaaS, software and services revenues were not a meaningful contributor to the Company's revenues in the third quarter of 2015, as the Ctrack acquisition did not occur until the fourth quarter of 2015.
  • Non-GAAP gross margin on hardware products increased to 29.5% in the third quarter of 2016, compared to 25.4% in the third quarter of 2015, primarily as a result of reduced sales of lower-margin legacy hardware products in the third quarter of 2016.
  • The Company's Ctrack telematics solutions which include a mix of hardware, SaaS, software and services, generated non-GAAP gross margins of 63.3% in the third quarter of 2016, continuing to drive the Company's overall gross margin expansion since the Company's acquisition of Ctrack in the fourth quarter of 2015.
  • Non-GAAP operating expenses were $23.3 million in the third quarter of 2016, compared to $16.3 million in the third quarter of 2015, an increase of 42.9%, primarily due to the acquisition of Ctrack in the fourth quarter of 2015. During the third quarter of 2016, the Company implemented restructuring initiatives intended to improve its strategic focus on its most profitable business lines while de-prioritizing certain hardware-only product lines to non-carrier customers.
  • Adjusted EBITDA increased to $2.3 million in the third quarter of 2016, compared sequentially to $1.7 million in the second quarter of 2016, and also compared year-over-year to ($0.3 million) in the third quarter of 2015. Adjusted EBITDA improved in the third quarter of 2016 due to the Company's emphasis on growing SaaS, software and services revenue, while also rationalizing the costs associated with its hardware business, in an effort to generate improved performance across multiple areas of the Company. Adjusted EBITDA contributed by Ctrack's telematics solutions was $2.7 million in the third quarter of 2016.
  • Non-GAAP net loss for the third quarter of 2016 was ($1.8 million), or ($0.03) per share, compared sequentially to ($3.4 million), or ($0.06) per share, in the second quarter of 2016, and also compared year-over-year to ($1.9 million), or ($0.04) per share, in the third quarter of 2015, as the Company continues to integrate its acquisition of Ctrack and transition toward an improved mix of higher-margin IoT solutions with significant SaaS and recurring revenue components.

Other Key Metrics
  Q3-2016   Q2-2016   Q3-2015
Revenue
SaaS, Software and Services Revenue $14.8 million $13.7 million $2.2 million
Non-GAAP Gross Margin 67.3 % 74.2 % 79.9 %
Hardware Revenue $46.1 million $49.1 million $52.0 million
Non-GAAP Gross Margin 29.5 % 27.8 % 25.4 %
IoT Revenue (1) $23.1 million $23.9 million $17.1 million
Non-GAAP Gross Margin 58.5 % 57.8 % 33.7 %
MiFi Revenue (1) $37.8 million $38.9 million $37.1 million
Non-GAAP Gross Margin 26.5 % 25.7 % 26.3 %
Subscribers
Ctrack Fleet Subscribers 182,000 174,000 n/a
Ctrack Non-Fleet Subscribers 229,000 215,000 n/a
FW Subscribers 179,000   168,000   159,000  
Total Consolidated Subscribers 590,000   557,000   159,000  

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(1) The Company currently places primary emphasis on its mix of SaaS, software and services revenues as compared to its hardware revenues. However, since the Company has historically reported its mix of MiFi (or mobile computing) revenues as compared to its IoT (or M2M) revenues, these metrics are presented as well.

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