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Novatel warns on disappointing MiFi outlook
Published: 2 November, 2009
Tags >> Financial | Hotspot | Dongle/Datacard | Wi-Fi
Novatel Wireless has a habit of spotting a new market early, only to see larger rivals, particularly Huawei, moving in for the kill. This happened in USB dongles, where Novatel was a pioneer along with Sierra and Option, and the same pattern may be occurring in 'personal hotspots'. Novatel has made a big splash with its MiFi device, which allows multiple Wi-Fi products to share a cellular connection, but its shares crashed by as much as 28% on Friday when it warned that MiFi sales were likely to be flat or slightly down in the fourth quarter, compared to the third.
It said it expects MiFi sales to be similar to those of Q3, a big disappointment to most observers, as "improving sell-through catches up to initial stocking orders". Some analysts questioned whether the MiFi was too expensive and saw less temporary problems for Novatel, particularly Huawei's threat to move into the portable hotspot sector in earnest. And longer term, Marvell, which makes the MiFi chipset, has already shown it integrated into a handset, suggesting that the market for dedicated personal WLan products will be a shortlived one, before the capability is incorporated into other units.
Novatel projected fourth quarter earnings, excluding items, of 7-15 cents on revenue of $85m to $95m.
"We believe that growth will resume as some carriers work through their initial orders, step up their training and promotional activities and eventually reduce the retail cost to end users," said CEO Peter Leparulo said in a conference call.
But the warning was taken as a major setback, especially as analyst expectations for the MiFi have been high - perhaps too high, given the inevitably short window that Novatel would have before it needed to face Huawei or others. If it fails to capitalize on its headstart in 2009 and early 2010, the window may have shut. Some pundits had forecast that MiFi would help take Novatel's earnings to 39 cents in 2010, up from a loss of four cents in 2008. Now some are revising their view. John Bright of Avondale Partners told Total Telecom that it was clear that MiFi expectations had been optimistic. "MiFi is a new product category with relatively high pricing, and more time is apparently needed to move it through the channel," he said.
As well as Huawei, Novatel's old rival Sierra Wireless recently announced plans to expand into the personal Wi-Fi sector. "With slower uptake and increasing competition in this category from Huawei and soon Sierra, our concerns for the longevity of the category are raised, as well as near term implications for Novatel," said Research Capital analyst Nick Agostino in a client note.
However, for the third quarter, Novatel did top Wall Street estimates with earnings of $6.22m or 20 cents a share, compared with a year-ago loss of $1.05m. Excluding stock-based compensation, earnings were 24 cents. Analysts had been expecting 10 cents. Net revenue jumped 20% to $94.3m, again ahead of Street projections of $92.6m and Novatel's own guidance of $90m to $95m.
