Catalysts & Opportunities:

• EBITDA Growth and Free Cash Flow Break-even (High Probability / High Impact): the stock price followed company fundamentals on a downward trend beginning in January 2011 but the company should achieve cash flow break-even either in 2Q13 or 3Q13 with increasing revenues. If revenues do not materialize, we expect management to cut costs to achieve cash flow break-even by year end. With $53M of Net Cash at 3/31/13 and market cap of $135M, the stock has re-rated during 2Q13 in anticipation of improving fundamentals. Upside from current market valuation should be supported by growth in EBITDA and free cash behind gaining/re-capturing market share in Mobile Hotspots (see “Investment Thesis” above), M2M growth (see bullet below), R&D cost initiatives, and potential product wins and cyclical pick-up in the Modems business.

• No Cash Taxes for at least 3-5 Years: NVTL has gross NOL carry-forwards of $91M with a full $64M valuation allowance against all Federal, State, and Canada NOLs. We do not assign any value currently to the tax asset, but this could potentially increase NVTL’s book value by $64M (or $1.90 per share) if this reverses.   

• M2M Growth Story (High Probability / Medium Impact): ever since the Enfora acquisition in late 2010, NVTL’s M2M business has under-performed relative to product launches (late to 3G from 2G platform) and negatively skewed profitability with excess SGA related to product sales and R&D. 1Q2013 revenue increased 50% Q/Q (10.3M from 6.8M in 4Q2012) and with industry growth rates of 15-20%, proven technological know-how, and ~40M annualized revenue base (versus SWIR 10X larger revenue base), it is reasonable to assume NVTL at least participates in the 15-20% growth and resulting overhead absorption and operating leverage. In addition, this could slowly change investor perception of NVTL from a “Communications Equipment Supplier” to a higher-growth story around “The Internet of Things” (as termed by SWIR management).    

• Patent Infringement Lawsuit VS ZTE Corp (Low Probability / High Impact): we currently attribute no value to the ZTE patent infringement lawsuit and management does not provide any quantitative metrics. We believe this could potentially result in a $50-100M cash settlement ($1.50 to $3.00 per share). 

Valuation:

• $7.50 price target is based on an equal-weighted EV/EBITDA, P/FCF and Revenue Multiple Comps: we believe 6x EBITDA and 15x Free Cash Flow are comparable industry multiples for NVTL and “Communications Equipment”. We define Free Cash Flow as EBITDA less Cash Interest less Cash Tax (pro forma fully taxed at 37.5%) less Maintenance Capital Expenditures. As mentioned above, we do not attribute any value to the company’s NOLs; however, under EV/EBITDA valuation, one could include some present value calculation of the $64M valuation allowance over some period and include as a pro forma cash adjustment. For example, assuming 8 years at 12% WACC and $8M cash benefit per year, the Present Value would be ~$40M ($1.20 per share). Regarding the 15x Free Cash Flow multiple, we assume NVTL’s multiple to be based a fully-taxed amount with a tax rate of 37.5%, (although NVTL is not actually paying any cash tax for the next 3-5 years. Our 2015-E projections result in $6M ($0.18 per share) of cash tax that will not be paid.  See the following table for the build-up of the EBITDA and FCF-based valuations as well as a sum of the parts based upon revenue multiples:

Key Risks:

• Lack of Demand for Mobile Hotspots: any alternative technology or customer habits to access wireless broadband networks could decrease demand for Mobile Hotspots, NVTL’s primary product. For example, enhancements to battery life or network security access, both frequently cited as demand drivers for Mobile Hotspots, could maintain status quo with wireless connectivity via laptops or phone. Wi-Fi city-wide access for free or for subscribers (see recent announcement from Google, Time Warner Cable, and Cablevision, among others) would also lower demand.

• High Customer Concentration: VZ has been >50% of NVTL’s revenue since 2010 and will likely remain a major customer. Any changes to VZ’s policies and marketing strategies (subsidies, trade-ins, data plans/pricing) relating to their 4G LTE platform (or future roll-outs) could significantly impact NVTL’s MiFi Mobile Hotspots franchise.

• ·Competition & New Product Cycles: every technology company is at risk of missing the next product cycle and NVTL is no different with Mobile Hotspots. ZTE and SWIR (NTGR acquired SWIR’s Air Card in April 2013) have been formidable competitors and carriers always prefer dual suppliers; however, NVTL’s patent portfolio provides a significant barrier to entry. The company currently owns 47 patents and has an additional 55 under application. NVTL has stated that they believe SWIR has also infringed on their patents but currently a lawsuit is only directed at ZTE because of clearer violations.

• M2M Execution + Unwillingness to Rationalize R&D: NVTL is still in the early stages of M2M product sales (~40M annualized revenue versus SWIR ~400M excluding Air Card acquired by NTGR) and just recently transitioned from a distributor model to direct sales (66% of 1Q2012 M2M revenue versus 38% last year). As such, there is significant investment required in R&D and SGA before realizing any revenue. As discussed above, NVTL’s 2012 $60M R&D on a $340M revenue-base is roughly equal to SWIR and NTGR, which had 2012 revenue of $640M and $1.3B, respectively. Management has a stated goal of 10% EBIT Margin and acknowledges they would evaluate cost initiatives if Mobile Hotspot and M2M forecasts do not materialize; however, any delays, unwillingness, or inability to rationalize R&D and SGA would result in negative EBITDA and further extend the free cash flow break-even thesis.

Disclosure

We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document.  We have no obligation to update this document.  We may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author.  Readers should do their own research.