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| NVTL > SEC Filings for NVTL > Form 10-Q on 2-Nov-2009 | All Recent SEC Filings |
2-Nov-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 cellular 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 wireless networks in the world 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).
Net Revenues. We believe that our future net 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 the next twelve months. We continue to develop and maintain strategic relationships with wireless and computing industry leaders like Alcatel-Lucent, Dell, QUALCOMM, Sony, Sprint PCS, Verizon Wireless, Telefonica, Virgin Mobile, Bell Distribution 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 Revenues. 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 revenues. Cost of revenues also includes warranty costs, amortization of intangible licenses, royalties based on a percentage of revenues, operations group expenses, costs associated with the cancellation of purchase orders, 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 net revenues 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
Future Accounting Requirements
In September 2006, the FASB issued authoritative guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosure requirements for assets and liabilities measured at fair value in the financial statements. In February 2008, the FASB issued authoritative guidance, which delays for one year the effective date of the authoritative guidance for fair value measurements for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of this accounting guidance did not have a material impact on the Company's financial condition or operating results.
On January 1, 2009, the Company adopted the FASB's authoritative accounting guidance regarding disclosure requirements for derivative instruments and hedging activities. This new guidance requires enhanced disclosures for derivative instruments, including those used in hedging activities. The adoption of this accounting guidance did not have an impact on the Company's statements of operations or balance sheet.
In April 2009, the FASB issued authoritative guidance for determining fair value when there is no active market or where price inputs represent distressed sales and for determining other-than-temporary impairments for debt securities. This guidance is effective for interim and annual periods ending after June 15, 2009. The application of this accounting guidance did not have a material impact on the Company's financial condition or operating results.
In October 2009, the FASB issued Accounting Standards Update ("ASU") 2009-13, which amends ASC Topic 605, Revenue Recognition, to require companies to allocate revenue in multiple-element arrangements based on an element's estimated selling price if vendor-specific or other third-party evidence of value is not available. ASU 2009-13 is effective beginning January 1, 2011. Earlier application is permitted. We are currently evaluating both the timing and the impact of the pending adoption of the ASU on our consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update ("ASU") 2009-14, which amends ASC Topic 985-605, Software-Revenue Recognition, to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product's essential functionality. ASU 2009-14 is effective beginning January 1, 2011. Earlier application is permitted. We are currently evaluating both the timing and the impact of the pending adoption of the ASU on our consolidated financial statements.
Results of Operations
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Net revenues. Net revenues for the three months ended September 30, 2009 were $94.3 million compared to $78.4 million for the same period in 2008. The overall increase in net revenues was primarily attributable to an increase in sales for our EV-DO products, partially offset by a decrease in our sales of High Speed Packet Access, or HSPA, products. The increase in EV-DO product sales for the three months ended September 30, 2009 compared to the same period in 2008 was approximately $35.2 million. The increase was primarily due to demand for the MiFi Intelligent Mobile Hotspot product, which was introduced in the second quarter of this year. EV-DO products are primarily sold in the North American market and represented approximately 88% of net revenues in the three months ended September 30, 2009 compared to 61% in the same period in 2008. The decrease in our HSPA product sales for the three months ended September 30, 2009 compared to the same period in 2008 was approximately $18.5 million. HSPA net revenues, primarily derived from the European market, represented approximately 12% of our net revenues in the three months ended September 30, 2009 compared to 38% for the same period in 2008. The decrease in HSPA net revenues for the three months ended September 30, 2009 compared to the same period in 2008 is primarily due to the continuous erosion of our market share in Europe due to the persistent competitive pressures we are currently experiencing in that market. We expect competitive pressure in Europe to continue at least through the remainder of 2009.
Cost of revenues.Cost of revenues for the three months ended September 30, 2009 was $64.5 million, or 68.4% of net revenues, as compared to $61.7 million, or 78.7% of net revenues, for the same period in 2008.
Cost of revenues as a percentage of net revenues for the three months ended of September 30, 2009 were positively impacted by the net effects of a favorable product mix.
In addition, cost of revenues as a percentage of net revenues for the three months ended of September 30, 2009 was favorably impacted by a reduction to the estimated purchase cancellation costs recorded in the second quarter of 2009. In the quarter ended June 30, 2009, a customer cancelled several purchase orders. As a result, the Company recorded $2.1 million in cancellation costs, consisting of cancellation fees and the cost of components that the Company was obligated to purchase from its contract manufacturer, and recognized that amount in cost of revenues in the three months ended June 30, 2009. During the three months ended September 30, 2009, the cancellation liability was reduced by $547,000 through negotiations with the manufacturer. The $547,000 was recorded as a reduction to the Company's cost of revenues for the three months ended September 30, 2009. At September 30, 2009, the Company's expected liability as a result of the cancellation of this significant order is $1.6 million.
Cost of revenues as a percentage of net revenues is expected to fluctuate in future quarters depending on the mix of products sold, competitive pricing, new product introduction costs and other factors.
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 September 30, 2009 was $29.8 million, or 31.6% of net revenues, compared to $16.7 million, or 21.3% of net revenues, for the same period in 2008. The increase was primarily attributable to the changes in net revenues and cost of revenues as discussed above.
Research and development expenses. Research and development expenses for the three months ended September 30, 2009 were $11.7 million, or 12.4% of net revenues, compared to $9.1 million, or 11.6% of net revenues, for the same period in 2008. The increase was due primarily to higher compensation expense, an increase in test and certification fees, and an increase in equipment and product development costs in the three months ended September 30, 2009 compared to the same period in 2008 to support expanded research and development and product introduction activities. The Company continues to believe that focused investments in research and development are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company's core business strategy. As such, the Company expects to make further investments in research and development to remain competitive.
In addition, research and development expenses as a percentage of net revenues are expected to fluctuate in future quarters depending on the amount of net revenues 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 September 30, 2009 were $5.5 million, or 5.8% of net revenues, compared to approximately $4.3 million, or 5.4% of net revenues, for the same period in 2008. The increase for the three months ended September 30, 2009 compared to the same period in 2008 was due primarily to the increase in cooperative marketing and advertising funds with a customer to support the launch of the MiFi Intelligent Mobile Hotspot product.
While managing sales and marketing expenses relative to revenues, 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 September 30, 2009 were $5.4 million, or 5.7% of net revenues, compared to $5.7 million, or 7.3% of net revenues, for the same period in 2008. Although expenses remained consistent for the three months ended September 30, 2009 as compared to the same period in 2008, expenses for the three months ended September 30, 2009 included approximately $1.5 million in professional fees primarily related to the Company's securities class action and intellectual property litigation discussed in Note 7 to the consolidated financial statements included in this report. The corresponding period for the prior year included professional fees and related expenses of approximately $1.3 million primarily related to the Company's internal review of revenue cut-off procedures, internal controls and accounting related to certain customer contracts. The Company concluded its internal review in September 2008.
Other income (expense), net. Other income (expense), net, for the three months ended September 30, 2009 was an income of $174,000 as compared to an expense of $608,000 for the same period in 2008. The overall increase in other income and expense is attributable to the strengthening of the Euro during the three months ended September 30, 2009 and the resulting impact on our Euro-denominated foreign exchange forward contracts and Euro-denominated receivables.
Income tax expense (benefit). Income tax expense, including discrete items, was $1.5 million, or 19.1% of income before taxes, for the three months ended September 30, 2009 compared to income tax benefit of $1.0 million, or 50.0% of income before taxes, for the same period in 2008. The estimated effective tax rate is lower for the three months ended September 30, 2009 compared to the same period last year due to the recognition of an approximately $1.4 million benefit in the three months ended September 30, 2009 related to a derecognition of the Company's uncertain tax liability. In the third quarter of 2009, the Company reduced its uncertain tax liability by approximately $3.1 million, including a related interest accrual of approximately $240,000, due to the expiration of the statute of limitations applicable to the 2005 taxable year and the completion of the examination of the Company's 2006 federal tax return. Approximately $1.4 million of this amount benefited the three months ended September 30, 2009 tax provision as a discrete item.
For the three months ended September 30, 2009, the Company recognized approximately $245,000 of interest expense related to unrecognized tax positions in the consolidated statement of operations compared to $114,000 for the same period last year. This amount was offset by the derecognition of approximately $240,000 of accrued interest expense related to the aforementioned reduction of the liability for unrecognized tax benefits in the three months ended September 2009.
The Company currently estimates its annual effective income tax rate, not including discrete items, to be approximately 30.9% for 2009, compared to 42.5% in 2008. The estimated annual effective income tax rate for 2009 is lower than for 2008 primarily due the effect of utilization of 2009 research and development credits.
On September 23, 2008, the State of California passed tax legislation that, among other things, places a moratorium on the use of net operating loss carryforwards and limited the use of certain tax credits to reduce state income tax liability in 2009. This legislation will impact our state income tax liability in 2009.
Net income (loss). For the three months ended September 30, 2009, we reported a net income of $6.2 million, as compared to a net loss of $1.0 million for the same period in 2008. Although operating expenses increased during the third quarter of 2009 compared to the same period last year, net income was favorably impacted by the increases in net revenues and gross margin percentage as discussed above.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Net revenues. Net revenues for the nine months ended September 30, 2009 were $248.8 million compared to $255.9 million for the same period in 2008. The overall decline in net revenues was primarily attributable to a decrease in sales for our High Speed Packet Access, or HSPA, products, partially offset by an increase in sales of our EV-DO products. The decrease in HSPA product sales for the nine months ended September 30, 2009 compared to the same period in 2008 was approximately $85.1 million. HSPA net revenues, primarily derived from the European market, represented approximately 10% of net revenues in the nine months ended September 30, 2009 compared to 43% for the same period in 2008. The decrease in HSPA net revenues for the nine months ended September 30, 2009 compared to the same period in 2008 is primarily due to the erosion of our market share in Europe due to the persistent competitive pressures we are currently experiencing in that market. We expect competitive pressure in Europe to continue at least through the remainder of 2009. The increase in our EV-DO product sales for the nine months ended September 30, 2009 compared to the same period in 2008 was approximately $78.0 million. This increase in EV-DO product sales was driven by an embedded module product for an E-reader and demand for the MiFi Intelligent Mobile Hotspot product, which was introduced during the second quarter of 2009. EV-DO products are primarily sold in the North American market and represented approximately 90% of net revenues in the nine months ended September 30, 2009 compared to 57% in the same period in 2008.
The currently unfavorable macroeconomic conditions make it more difficult to forecast trends in net revenues in the near term and we expect these conditions to continue through the remainder of the year.
Cost of revenues. Cost of revenues for the nine months ended September 30, 2009 was $184.4 million, or 74.1% of net revenues, as compared to $194.8 million, or 76.1% of net revenues, for the same period in 2008.
Cost of revenues as a percentage of net revenues for the nine months ended of September 30, 2009 was positively impacted by the net effects of a favorable product mix. Cost of revenues as a percentage of net revenues is expected to fluctuate in future quarters depending on the mix of products sold, competitive pricing, new product introduction costs and other factors.
Gross margin. Gross margin for the nine months ended September 30, 2009 was $64.4 million, or 25.9% of net revenues, compared to $61.1 million, or 23.9% of net revenues, for the same period in 2008. The increase was primarily attributable to the changes in net revenues and cost of revenues as discussed above.
Research and development expenses. Research and development expenses for the nine months ended September 30, 2009 were $33.4 million, or 13.4% of net revenues, compared to $27.6 million, or 10.8% of net revenues, for the same period in 2008. The increase during the year was primarily due to higher compensation expense, an increase in equipment and product development costs and an increase in test and certification fees in the nine months ended September 30, 2009 as compared to the same period in 2008. These expenditures were primarily made to support expanded research and development and product introduction activities. The Company continues to believe that focused investments in research and development are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company's core business strategy. As such, the Company expects to make further investments in research and development to remain competitive.
In addition, research and development expenses as a percentage of net revenues are expected to fluctuate in future quarters depending on the amount of net revenues 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 nine months ended September 30, 2009 were $14.8 million, or 6.0% of net revenues, compared to approximately $14.7 million, or 5.8% of net revenues, for the same period in 2008. Sales and marketing expenses were relatively consistent during the nine months ended September 30, 2009 as compared to the same period in 2008. While managing sales and marketing expenses relative to revenues, 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 nine months ended September 30, 2009 were $14.2 million, or 5.7% of net revenues, compared to $18.2 million, or 7.1% of net revenues, for the same period in 2008. The overall decline in general and administrative expenses was primarily attributable to a decline in professional fees and decreases in our provision for bad debt for the same period in 2008. The expenses for the nine . . .
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