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| NVTL > SEC Filings for NVTL > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
The following information should be read in conjunction with the consolidated financial statements and the accompanying notes included in Item 1 of this report, as well as the audited consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2008 contained in our Annual Report on Form 10-K for the year ended December 31, 2008.
Overview and Background
We are a provider of wireless broadband access solutions for the worldwide mobile communications market. Our broad range of products includes third generation, or 3G, wireless PC card and ExpressCard modems, embedded modems, USB modems and other fixed-mobile convergence, or FMC, solutions and communications software for wireless network operators, infrastructure providers, distributors, original equipment manufacturers, or OEMs, and vertical markets worldwide. Through the integration of our hardware and software, our products are designed to operate on a majority of global wireless networks and provide mobile subscribers with secure and convenient high speed access to corporate, public and personal information through the Internet and enterprise networks. We also offer software engineering, integration and design services to our customers to facilitate the use of our products.
Our strong customer relationships provide us with the opportunity to expand our market reach and sales. Most of our sales to wireless operators and OEMs are sold directly through our sales force. To a lesser degree, we also use an indirect sales distribution model through the use of select distributors. We are continuing to drive widespread adoption of our products through increased global marketing activities, expansion of our sales team and distribution networks and continued leverage of our strategic relationships with wireless industry leaders.
We intend to continue to identify and respond to our customers' needs by introducing new product designs with an emphasis on supporting cutting edge Wide Area Network, or WAN, technology, ease-of-use, performance, size, weight, cost and power consumption. We manage our products through a structured life cycle process, from identifying initial customer requirements through development and commercial introduction to eventual phase-out. During product development, emphasis is placed on time-to-market, meeting industry standards and customer product specifications, ease of integration, cost reduction, manufacturability, quality and reliability.
Factors Which May Influence Future Results of Operations
We have entered into and expect to continue to enter into new customer contracts for the development and supply of our products. This may place significant demands on our resources.
The continuing global financial crisis and the resulting slowdown in the worldwide economy is causing, and we expect may continue to cause, contraction in demand for our products. In addition, the financial crisis may continue to have an impact on the value of our investment portfolio, foreign currency exchange gain (loss), and net investment interest income (loss).
Revenue. We believe that our future revenues will be influenced largely by the speed and breadth of the demand for wireless access to data through the use of next generation networks including demand for 3G products and 3G data access services, particularly in Europe, North America and Asia; customer acceptance for our new products that address these markets, including our MiFi™ line of Intelligent Mobile Hotspots; and our ability to meet customer demand. Factors that could potentially affect customer demand for our products include the following:
• economic environment and related market conditions;
• increased competition from other wireless data modem suppliers as well as suppliers of emerging devices that contain a wireless data access feature;
• demand for broadband access services and networks;
• use of the Internet;
• rate of change to new products;
• loss of significant customers, including current laptop customers who transition to alternative embedded module platforms such as QUALCOMM's Gobi platform;
• timing of deployment of 3G networks by carriers;
• decreased demand for EV-DO, HSDPA and HSUPA products; and
• changes in technologies.
We anticipate introducing additional 3G products during 2009. We continue to develop and maintain strategic relationships with wireless and computing industry leaders like Alcatel-Lucent, Dell, Hon Hai, QUALCOMM, Sony, Sprint PCS, Verizon Wireless, Telefonica, and Vodafone and software vendors. Our strategic relationships also include technology and marketing relationships with wireless operators, OEM partners that integrate our products into other devices, distributors and leading hardware and software technology providers. Through these strategic relationships, we have been able to enhance our market penetration activities by leveraging the resources of our channel partners, including their access to distribution resources, increased sales opportunities and market opportunities.
Cost of Revenue. We currently outsource our manufacturing operations to LG Innotek and IAC. In addition, we currently outsource certain distribution, fulfillment and repair services related to our business in EMEA to Mobiltron. All costs associated with these manufacturers and Mobiltron are included in our cost of revenue. Cost of revenue also includes warranty costs, amortization of intangible licenses, royalties based on a percentage of revenue, operations group expenses, costs related to outside services and costs related to inventory adjustments, including write downs for excess and obsolete inventory. Inventory adjustments are impacted primarily by demand for our products, which is influenced by the factors discussed above.
Operating Costs and Expenses. Many of our products target wireless operators and other customers in North America, Europe, and Asia. We will likely develop new products to serve these markets, resulting in increased research and development expenses associated with such new product development. We have in the past and expect to continue to incur these expenses in future periods prior to recognizing revenue from sales of these products.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. Actual results could differ from these estimates. Critical accounting policies and significant estimates include revenue recognition, allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, provision for warranty costs,
New Accounting Pronouncements
During the first quarter of 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 157-2, Effective Date of FASB Statement No. 157. FSP No. 157-2 delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS 157 related to non-financial assets and non-financial liabilities did not have a material impact on our financial statements. In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides guidance on determining fair value when there is no active market or where the price inputs being used represent distressed sales. FSP No. 157-4 is effective for interim and annual periods ending after June 15, 2009 and will be adopted by the Company beginning in the second quarter of 2009. Although the Company will continue to evaluate the application of FSP No. 157-2 and FSP No. 157-4, management does not currently believe adoption of these accounting pronouncements will have a material impact on the Company's financial condition or operating results.
On January 1, 2009, the Company adopted the provisions of SFAS 161 ("SFAS 161"), Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. The adoption of this accounting pronouncement did not have an impact on the Company's statements of operations or balance sheet.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which provides operational guidance for determining other-than-temporary impairments ("OTTI") for debt securities. FSP No. 115-2 and 124-2 is effective for interim and annual periods ending after June 15, 2009. Although the Company will continue to evaluate the application of FSP No. 115-2 and 124-2, management does not currently believe this accounting pronouncement will have a material impact on the Company's financial condition or operating results.
Results of Operations
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Revenue. Revenue for the three months ended March 31, 2009 decreased $17.4 million, or 19.8%, to $70.4 million compared to $87.8 million for the same period in 2008. The decrease in revenue was primarily attributable to decreases in sales for our High Speed Packet Access, or HSPA, products partially offset by an increase in our EV-DO products. The decrease in HSPA product sales, which were mainly shipped to the European market, for the three months ended March 31, 2009 compared to the same period in 2008 was approximately $31.0 million. The decrease was primarily due to the combined effects of lower unit shipments of our products and lower average sales prices due to competitive pricing pressures. Our EV-DO product sales increased by approximately $13.3 million during the three months ended March 31, 2009 compared to the same period in 2008, primarily as a result of the increase in revenues from new embedded module product sales to a content delivery device customer. Overall, EV-DO revenue, which consists primarily of North American products, represented approximately 86% of revenue in the three months ended March 31, 2009 compared to 54% in the same period in 2008 while HSDPA/HSUPA products represented approximately 14% of revenue in the three months ended March 31, 2009 compared to 46% in the same period in 2008.
The continuing slowdown of global economies resulted in lower demand for our products adversely affecting our revenues and operating results for the first quarter of 2009. The current economic circumstances make it more difficult to forecast revenue trends in the near term as we expect unfavorable macro economic conditions in our key markets to continue throughout 2009.
The current global economic conditions and related increased competitive pressures may continue to negatively impact the average sales prices of our products. This may require us in future periods to record inventory write downs to reflect lower of cost or market adjustments and revalue certain assets that may become impaired.
Gross margin. Gross margin for the three months ended March 31, 2009 was $16.1 million, or 22.8% of revenue, compared to $21.7 million, or 24.7% of revenue, for the same period in 2008. The decrease was primarily attributable to the changes in revenue and cost of revenue as discussed above. We expect that our gross margin percentage will continue to fluctuate from quarter to quarter depending on product mix, competitive selling prices, our ability to reduce product costs and changes in unit volumes.
Research and development expenses. Research and development expenses for the three months ended March 31, 2009 were $11.0 million, or 15.6% of revenue, compared to $9.2 million, or 10.4% of revenue, for the same period in 2008. The dollar increase was primarily attributable to an increase in consulting and outside services of approximately $1.1 million, and an increase in equipment and supplies expenses of approximately $600,000 related to new product development. Research and development expenses as a percentage of revenue are expected to fluctuate in future quarters depending on the amount of revenue recognized, and potential variation in the costs associated with the development of the Company's products, including the number and complexity of the products under development and the progress of the development activities with respect to those products. However, we expect to maintain or increase our investment in research and development to continue to provide innovative products and services.
Sales and marketing expenses. Sales and marketing expenses for the three months ended March 31, 2009 were $4.5 million, or 6.4% of revenue, compared to approximately $5.5 million, or 6.2% of revenue, for the same period in 2008. The reduction in expense was primarily attributable to a decrease of approximately $400,000 related to marketing expenses, a decrease in salaries and related expenses of approximately $400,000, and a decrease of approximately $200,000 in travel and related expenditures. While managing sales and marketing expenses relative to revenue, we expect to continue to make selected investments in sales and marketing as we introduce new products, market existing products, expand our distribution channels and focus on key customers around the world.
General and administrative expenses. General and administrative expenses for the three months ended March 31, 2009 were $4.5 million, or 6.3% of revenue, compared to $5.4 million, or 6.1% of revenue, for the same period in 2008. The dollar decrease was primarily attributable to a decrease in bad debt expense of approximately $700,000, and a decrease in salary and related expenses of approximately $200,000.
Interest income, net. Interest income, net, for the three months ended March 31, 2009 was $481,000 as compared to $1.5 million for the same period in 2008. This decrease was primarily due to declines in market interest rates and investment yields and a decline in our average cash and marketable securities balances as compared to the same period in 2008.
Other income (expense), net. Other expense, net, for the three months ended March 31, 2009 was $84,000 as compared to income of $546,000 for the same period in 2008. This decline was primarily due to losses on our Euro-denominated cash and receivable balances, offset by gains on our Euro-denominated foreign exchange forward contracts.
Income tax expense (benefit). Income tax benefit was approximately $1.1 million, or 30% of loss before taxes, for the three months ended March 31, 2009, compared to $1.9 million of income tax expense, or 51.2% of income before taxes, for the same period in 2008. The effective income tax rate for 2009 is lower than for 2008, primarily due to the Company's utilization of federal and state research and development tax credits, offset by our inability to currently deduct for federal income tax expense associated with certain equity incentive awards that were expensed for financial statement purposes.
The estimated annual effective tax rate of 36.4% for 2009 is 2.4% higher than the U.S. federal statutory rate predominantly due to the Company's estimate of state income taxes.
For the three months ended March 31, 2009, the Company included $101,000 of interest expense related to uncertain tax positions in its consolidated statement of operations. This expense is recorded as a discrete item in the Company's tax provision.
On September 23, 2008, the State of California enacted tax legislation that, among other things, placed a moratorium on the use of net operating loss carryforwards to reduce state taxable income in 2008 and 2009. In October 2008, the United States Congress enacted tax legislation that, among other things, extended the federal research and development tax credit to December 31, 2009. We presently expect that this legislation will impact our 2009 federal and state income tax liabilities.
California income tax legislation enacted in the first quarter of 2009, among other things, permits an irrevocable annual elective single sales apportionment factor for taxable years beginning on or after January 1, 2011. FASB Statement No. 109 provides that the impact of changes in tax laws or rates on deferred tax assets and liabilities existing at the enactment date must be recognized as a discrete item in the period that includes the enactment date. As a result of this legislation, the Company reduced its California deferred tax asset by approximately $124,000 as of March 31, 2009.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and marketable securities and cash generated from operations. We do not currently have a revolving credit facility or similar loan agreement. As of March 31, 2009, we had working capital of $166.0 million and approximately $133.1 million in cash and cash equivalents and short and long-term marketable securities, which is a decrease of approximately $10.1 million from $143.2 million at December 31, 2008. The decrease is primarily related to increases in working capital, primarily trade accounts receivable and inventories, offset by an increase in trade accounts payable.
We will continue to have cash requirements to support working capital needs. We intend to use cash and investments on hand, and cash generated from operations to meet these requirements. We believe that our existing cash and investment balances, and cash from operations will be adequate to meet our normal cash requirements over the next 12 months.
Historical Cash Flows
Operating Activities. Net cash used in operating activities was approximately $9.1 million for the three months ended March 31, 2009, compared to net cash provided by operating activities of $82,000 for the same period in 2008. During the three months ended March 31, 2009, the $9.1 million in cash used in operating activities was primarily attributable to our quarterly net loss of $2.5 million and increases in our accounts receivable and inventory offset by increases in accounts payable and non-cash charges including depreciation and amortization, and share-based compensation. During the three months ended March 31, 2008, the $82,000 in cash provided by operating activities was primarily attributable to our quarterly net income of $1.8 million, decreases in our accounts receivable balances, and non-cash charges including depreciation and amortization, charges for inventory losses, and share-based compensation offset by increases in inventories and accrued expenses.
Investing activities. Net cash used in investing activities for the three months ended March 31, 2009 was approximately $16.6 million, compared to net cash provided by investing activities of approximately $20.8 million during the same period in 2008. Net cash used in investing activities in the three months ended March 31, 2009 was primarily related to purchases of investment securities. The net cash provided by investing activities in the three months ended March 31, 2008 was primarily due to the sale and maturity of investment securities, offset by purchases of investment securities and purchases of property and equipment to establish production capacity at a second contract manufacturer of the Company's products.
Financing activities. Net cash used in financing activities for the three months ended March 31, 2009 was approximately $34,000 for the three months ended March 31, 2009, compared to $6.5 million used in financing activities during the same period in 2008. Net cash used in financing activities during the three months ended March 31, 2009 was primarily related to payments made on capital leases, offset by excess tax benefits from stock option exercises and proceeds from the exercise of stock options and stock purchases through our employee stock purchase plan. Net cash used in financing activities in the three months ended March 31, 2008 was primarily due to the Company's repurchase of $7 million of its outstanding common stock on the open market pursuant to a repurchase program. During the three months ended March 31, 2008, the Company repurchased a total of 658,061 shares of its outstanding common stock for $7.0 million under the repurchase program.
The Company expects to incur professional fees and expenses to defend litigation filed against the Company or related to its products, which litigation is discussed in Note 7 to our consolidated financial statements included in this report. These costs cannot be estimated at this time.
During the next 12 months we plan to incur approximately $13 million to $16 million for the acquisition of property and equipment and additional licenses.
We believe that our available cash and investments, together with our operating cash flows, will be sufficient to fund operations, including the potential expansion of our sales and marketing team, the further development of our new products and the related potential increase in our general and administrative expenses, and to satisfy our working capital requirements and anticipated capital expenditures for the next 12 months. Our future revenue is dependent on us fulfilling our commitments under agreements with a small number of major customers. Our liquidity could be impaired if there is any interruption in our business operations, a material failure to satisfy these contractual commitments or a failure to generate revenue from new or existing products.
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