Novatel Wireless Q2 results to be sunk by smartphones: Scotia

With more and more Internet-ready smartphones flooding the market, consumers are unlikely to spend their data dollars on mobile modems sold by companies such as Novatel Wireless Inc., an analyst with Scotia Capital said in a new note.
Gus Papageorgiou, analyst with Scotia Capital, warned Novatel’s upcoming second-quarter results, expected after the close on Tuesday, will underperform due to competitive pressures. He forecasts US$70-million in revenues and an EPS loss of US9¢, in line with consensus.

Meanwhile, his expectations of US$66-million in revenue and an EPS loss of US10¢ in the third quarter are both less than consensus of US$75-million and a loss of US4¢ a share as benefits from 4G network rollouts will not appear until at least the fourth quarter.
“We do not believe Novatel’s dependence on its MiFi (mobile modem) products will offset the decline in its core business. We advise investors to avoid the name,” Mr. Papageorgiou said in a note to clients.
MiFi is Novatel’s core business, accounting for almost half of its sales in the past quarter. However, competition in the 3G USB modem space is “intense” and only getting worse as more consumers use their smartphones to surf the Web.
Another problem is Novatel’s business is concentrated in North America, and especially with U.S.-based Verizon and Sprint. The company’s devices are also carried in Canada by both Rogers and Bell.
“While the company is optimistic on the product’s long-term success, we believe the current generation of MiFi products will quickly be replaced by increasingly capable smartphones,” he said. “Until Novatel releases a next-generation product that can truly differentiate itself from the smartphone feature, we remain skeptical of the MiFi’s sustainability.”
Until Novatel gets traction and contracts in 4G, Mr. Papageorgiou does not expect material improvements for the company and maintains a Sector Underperform rating with US$5.70 price target.