NOVATEL WIRELESS INC MIFI
August 12, 2016 - 3:40pm EST by
kiss534
2016 2017
Price: 2.52 EPS 0 0
Shares Out. (in M): 53 P/E 0 0
Market Cap (in $M): 133 P/FCF 0 0
Net Debt (in $M): 87 EBIT 0 0
TEV ($): 219 TEV/EBIT 0 0

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Description

Hidden away in the over-the-counter market trading  below three dollars is Novatel, a supplier to Verizon  and  other telecommunications companies. Novatel has recently reinvented itself acquiring a South African fleet control company- Digicore- which has 20% plus sales growth record with anticipated 50% of its business in the IOT Internet of Things space.
 
Novatel has been transforming itself from primarily a hardware supplier (to the telcos) to a software as a service SAAS solutions for the telematics market. Novatel is made up of its legacy business - original hardware supplier of Wifi hot boxes to Verizon and now the recently acquired Digicore October 2015, which has been a transformative acquisition. Recent estimates for the legacy business of  Novatel hardware are about $200 million with the Digicore adding an additional $60 million.
What excites us about the company is their most recent acquisition of Digicore, which we would like think as a baby Fleetmatics (FLTX). Digi however has been in business over a decade with a very robust platform in use worldwide. Certainly Fleetmatics is the much larger of the two with over 550,000 subscribers compared to 175,000 subscribers, both offering fleet management tracking services and other telematics solutions. Digi has an additional 345,000 subscribers which along with fleet subscribers make up their Ctrack Group. This area includes user based insurance, asset tracking and monitoring services. Thus we have over 500k SAAS subscribers in over 50 countries in six continents with the company moving to newer markets and expanding into US.
 Customers of Ctrack include KLM, Coca-Cola and Mercedes (stolen vehicle tracking for all Mercedes commercial vehicles). Digicore has 190,000 subscribers in stolen vehicle and asset tracking- think LoJack.
Wi-Fi hotspots are sold to Verizon as a legacy business with the recent conference call indicating that Verizon will be offering new next generation hotspots and home phone connectivity- probably more IOT.
 Digicore is new to the US stock market and now a part of Mifi and has plans to enter the US fleet control market. Digicore reported in 2 qtr that the Ctrack fleet management solutions grew at an annualized 24% rate.
In November 1915, the company secured a five-year senior revolving credit facility of $48 million from Wells Fargo Bank and currently unused. This initially opened October 2014 with a $25 million capacity and was expanded.
Digicore has about two thirds of its’ sales which are SAAS recurring revenues with a very low churn ( low single-digit). About half of revenues from Africa and the balance the America's, Middle East, Europe but nada thus far from the USA.
The legacy Mifi business products sold primarily to Verizon is the cash cow and facilitates the transformation to the Internet of Things- IOT- which by year end is estimated to be almost 50% of revenues compared to 20% last year, before the acquisitions. The IOT service also includes asset tracking.
 
 CTrack combines small telematics, fleet management and employee ID and recently won a hotly contested IOT contract, beating eight other contenders to service all KLM equipment and services at Schiphol Airport in Amsterdam. Now KLM will be able to monitor who is using their extensive equipment for a solution which includes a unique SAAS platform that facilitates many departments and other suppliers operating at the airport to manage access and monitor staff to KLM equipment.
 Earlier this year, Ctrack reported that it aided in the recovery of two fuel tankers valued at over $1 million that were stolen in South Africa and were  recovered within hours through asset monitoring and fleet tracking. Ctrack disclosed that the recovery rate of stolen assets was over 90% due to their advanced technology in partnership with law enforcement. Additionally Ctrack is working on ridesharing based  usage insurance with Uber in South Africa- a solution that obviously can be leveraged elsewhere.
 
  Currently CTRACK has an estimated 175,000 global fleet subscribers,  estimated 20+ percent growth rate and a market penetration of about 20%. In addition Digicore has an additional hundred 190,000 subscribers in asset recovery as mentioned.
Industry analysts at Timetric recently projected global sales of telematics user based auto insurance policies growing at a compound annual growth of an astounding 80% through 2018. Automobile insurers leverage big data with innovative and effective program that fuels growth of usage-based insurance. Progressive in US has similar incentive programs that have encouraged drivers to be more mindful of careless driving and has actually resulted in fewer accidents. It is estimated that 90% of accidents are caused by driver’s actions behind the wheel. This past month saw Novatel and a global partner team up in using contract link management solutions to allow Thrifty managers to protect employer rental vehicles against damage, loss and theft. Dollar Thrifty is one of the fastest-growing independent car rental dealers in South Africa.
Sue Swenson is a dynamite  president of the company who is paid a salary of a dollar year but  incentivised with stock  above $3.41. She has been granted an option of  951,000 shares and exercise price of 2.27 but the option can only be exercised with stock above 3.41.
 
 To summarize then-
Novatel MIFI is a low-priced stock that is going through a major metamorphosis evolving from a hardware company to of a software SAAS wireless company in some very exciting fields.  The basic legacy business continues to deliver cutting-edge mobile broadband hot boxes and devices to Verizon and supports their network transitions. From this core business is evolving a fast growing fleet management business, think Fleetmatics, and a asset recovery auto business, think LoJack. Both  areas have come to the fore in the past year and growing at about 20%, all involving IOT Internet as a service.
One can then put the company in three areas- one the newly acquired  Digicore which is fleet management services used in auto, truck market to a second area-asset recovery and asset protection market. And three, the legacy hardware Verizon business.
The recently acquired for CTRAC- a South African fleet control firm with a very robust software package, in business well over 10 years, that has 557,000 subscribers made up of 150,000 fleet, 250,000 asset tracking subscribers with the balance in assorted areas.

The recent Verizon acquisition of Fleetmatics at eight times revenues reinforces the future implication of this industry. Estimating $60 million in SaaS, software and services for 2016 and using a modest five times sales brings us to $300 million  value of like FLTX sales. Evaluating the remaining revenues of $200 million at one times revenues (Netgear, Sierra Wireless comparison), brings us to a combined potential of $500 million or about $9.43 a share.
And let us recall that CalAmp recently bought Lojack and Verizon just announced it is buying Fleetmatics. And this is what MIFI is all about today.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

!.Brokerage coverage

2.Discovery of a new IOT in a fast growing field with potential takeovers.

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