Inseego Corp. Q1 FY2022 Earnings Call

Hello, and welcome to Inseego Corp's First Quarter 2022 Financial Results Conference Call. Please note today's event is being recorded. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity for analysts to ask questions. On the call today are Ashish Sharma, CEO, Bob Barbieri, Chief Financial Officer, and other members of the management team. During this call, non-GAAP financial measures will be discussed. A reconciliation to the most directly comparable GAAP financial measures is included in the earnings release which is available on the Investors' section of the Company's website. An audio replay of this call will also be archived there. Please also be advised that today's discussion will contain forward-looking statements. These forward-looking statements are not historical facts, but rather are based on the Company's current expectations and beliefs. For a discussion on factors that could cause actual results to differ materially from the expectations, please refer to the risk factors described in our Form 10-K, 10-Q, and other SEC filings, which are available on our website. Please also refer to the Cautionary Note Regarding Forward-Looking Statements section contained in today's press release. I would now like to turn the call over to Ashish Sharma, CEO. Please go ahead.

Thank you, operator, and welcome to Inseego’s first quarter fiscal 2022 earnings call. This is my first earnings call as the CEO, and I'm proud to be reporting a solid quarter of execution to start off 2022. Before I get into the details, I want to take a step back and reflect on where we are as a company in terms of our strategy and execution and share my vision for Inseego’s future. I will then provide a summary of our Q1 progress. Let's start with our strategy. Our objective is to position Inseego as a key solutions provider for enterprises, which has taken on a new sense of urgency in the last couple of years due to the need for increasingly distributed enterprise workflows. We plan to address this through what we call a 5G edge cloud, which comprises three components: a highly flexible 5G WAN connection, anchored by Inseego’s world-class devices, a cloud networking software stack allowing the creation of a 5G WAN, and a purpose-built suite of enterprise applications. Our approach to this very large market opportunity starts with providing the best performing, highly flexible, and most secure 5G WAN access to the 5G networks built by the carriers. Inseego now has the most extensive and highest performing 5G products, both mobile broadband and fixed wireless, in the market today. In addition to being offered by leading carriers around the world, we have created a strong pipeline of enterprise customers in multiple regions who are starting to roll out our 5G WAN solutions for various use cases. We've also integrated a comprehensive software platform into these products to provide a unified view for our customers, allowing them to fully manage these 5G WAN solutions. The software is the key technology powering our 5G Edge cloud, where we are bringing all these pieces of our solutions together. This critical layer of software is essential for enabling enterprises to move their corporate LAN into the Inseego 5G Cloud. When we introduce this to the market in the near future, our enterprise customers will be able to innovate at the edge and empower a more secure distributed workforce at branch locations or with a 5G network fabric for the first time. Current enterprise WAN architectures are complex, highly fragmented, expensive to maintain, and dependent on costly on-premise appliances and hard-to-integrate third-party solutions. They are also burdened with multiple management consoles and policies. This large attack surface area makes them vulnerable to cyberattacks. Inseego is transforming the enterprise WAN market by offering the full stack of networking capabilities as a 5G cloud app. The cornerstone of the third part of our enterprise strategy is the Ctrack application portfolio, which currently serves thousands of enterprise and SMB customers. We plan to offer this application suite as part of our 5G Edge cloud, as it has great synergy with the other two solution portfolios I described earlier. Since the sale of the Ctrack South Africa unit, we've been busy modernizing the architecture of this application while enabling 5G and integrating it into our 5G Edge cloud. We see a huge opportunity to utilize this technology to digitize many facets of enterprise operations across industries such as transportation, construction, logistics, supply chain, energy, utilities, services, local governments, and more. We will have more to say during our next call, but I'm really excited about the progress we've made and believe the improvements will help accelerate growth. Note that our carrier customers are also our key partners in this new 5G enterprise journey. In addition to selling our high-performing hotspots and fixed wireless access devices, carriers are also important go-to-market partners for our enterprise 5G solutions. T-Mobile is a great example of this, where we have two ways to sell our products. First is what we call stock, where T-Mobile buys our devices directly and sells them to their customers as part of their service package. The second is what we call sell with, where the T-Mobile sales force brings us enterprise opportunities that we fulfill through the VAR and distributor channel. We see similar arrangements developing in other global markets where we will sell both directly to the carrier and to its preferred channel partners. Ultimately, our carrier relationships will be an important driver of growth and profitability as we look to take market share in what is still a nascent and rapidly growing market. With that, let's dive into the first quarter. I'm pleased to report that we are off to a good start in '22, with revenue growth of 23% year-over-year on a pro forma basis, excluding Ctrack South Africa. Our gross margin rebounded from the prior quarter. Had it not been for minor supply chain issues that affected our enterprise business late in the quarter, our revenue would have exceeded street consensus. Reflecting our focus on next-generation products and go-to-market expansion, 5G revenue grew by 142% year-over-year and comprised 44% of total revenue. Importantly, next-generation software solutions represented 23% of total revenue in Q1. Bob will provide more details in a moment. As I'm sure all of you are aware, COVID-related lockdowns were instituted in China late in Q1. I'm very proud of how Inseego navigated the global supply chain challenges over the past year. There are a few companies, large or small, that have not been affected. We continue to see lead times lengthening, with limited availability of parts in the spot markets and rising shipping costs, especially for our products with relatively short sales cycles. Although we were relatively unaffected in Q1, a prolonged lockdown in China may have a greater impact in Q2, particularly concerning our anticipated new product launches. I will now touch upon new customer expansions from this quarter, both on the carrier side and through our new enterprise initiatives. During the quarter, we launched a 5G solution with TELUS in Canada, and you saw the U.S. Cellular fixed wireless announcement last week. In North America, our 5G products are certified by all major carriers. We have a broad range of engagements with both carriers and enterprises, which we are very proud of. Our investments in targeted international markets in Europe, the Middle East, and Australia are beginning to pay off after a couple of years of investment. We see repeat orders from several international customers, which is encouraging. As a run rate business in new markets is starting to build up and is expected to contribute more meaningfully to our growth in '22. We also garnered a new carrier customer in the Nordics, and we shipped the initial quantity of products to them recently. On the enterprise side, we saw good progress with new customer engagements for our 5G solutions in multiple regions. As I've stated in prior calls, we're still in the early stages of 5G adoption for enterprises. 5G networks are becoming increasingly ubiquitous and evolving to meet the requirements for enterprise use. While we may see the 5G icon on our mobile phones and conclude that coverage is sufficient, the underlying infrastructure is still evolving with new mid-band capacity, new 5G standalone core networks, and carrier data plans to make 5G a primary solution for enterprises. We believe this is a large market in the making as carriers will push hard to drive many enterprise use cases onto these newly built 5G networks. With our fixed wireless access (FWA) portfolio, we are well-positioned to win in this market. Speaking of FWA, we are encouraged by the continued growth in our pipeline, but more importantly, we are seeing several customers move to deploy our products broadly across their organizations. These engagements follow a typical pattern where an enterprise will buy three to five-plus devices to test. Thereafter, they order 30 to 50 devices for small-scale deployment before rolling out company-wide, which in many cases requires thousands of Inseego devices. These customers are also leveraging our cloud-based software to manage and secure the devices across their distributed workforce or branch locations. Let me provide a few examples. One example is an enterprise customer with over 27,000 employees who were looking for a reliable 5G work-from-home solution to offer their remote employees, ensuring a secure and consistent user experience, no matter where they were located. To ensure security and consistency, the customer is now using our cloud management solution so that their IT team can have visibility into the entire deployment, enabling them to manage, configure, and monitor the connections all from a single pane of glass. In the retail sector, we have a couple of U.S.-based customers laying the foundation for their own digital transformation, leveraging our solutions for 5G connectivity across their stores to power several applications requiring reliable real-time connections, such as surveillance. These customers, one in the industrial supply sector with approximately 2,000 stores and a nationwide clothing retailer with 800 stores respectively, have successfully completed all testing and are now starting widespread deployments. Finally, we are seeing an accelerated drive to close the digital divide, largely driven by 5G being significantly easier and cheaper to deploy than fiber in many instances, in addition to its ability to handle massive data amounts. Most recently, we secured a deal with one of the top public libraries in the U.S. with over 90 branches, serving a population of over 3.5 million. They are leveraging our 5G Cloud Managed Solutions. As you can see, we are making significant progress against our key strategic objectives. I want to thank the employees of Inseego for their tireless work and solid execution. With our robust 5G product portfolio and growing enterprise pipeline, we remain confident that Inseego is well-positioned to achieve our financial goals. However, there are a number of factors that cloud our near-term visibility. First is the plateauing of our 4G hotspot business. After setting records in 2020 and 2021, the first quarter reflected the normalization of 4G as 5G becomes more widespread. This has always been expected and given that this portfolio carries our lowest gross margins, it is a positive transition. Second is the evolution of enterprise 5G data plans that are key to broader adoption of FWA. These plans are now being released. Our current expectation is for several key partners to begin ramping during the summer, positioning us for a strong finish to the year. We've always planned on a strong back half of the year, but we also projected those data plans to be released a few months ago. Lastly, regarding the supply chain, as we've said in previous quarters, we've not really experienced any meaningful supply chain issues on our existing products, and this remains accurate today. However, we remain wary that ongoing supply chain challenges associated with COVID-related lockdowns in China could impact our new product launches later in 2022. Once factories reopen, we will be able to fully engage regarding our new rollouts. All these factors together may push out our growth expectations for the 2022 calendar year. Note that we measure this as a delay in terms of months, as opposed to multiple quarters or more. We will update our thinking once we have greater certainty around the timing of carrier FWA rollouts and the easing of COVID restrictions in China. I would now like to turn the call over to Bob, who will provide more details on our Q1 results.

Thank you, Ashish. Let me now review the results of our first quarter fiscal 2022. Please note that all metrics and comparisons made are non-GAAP on a pro forma basis, adjusted for the divestiture of Ctrack South Africa, completed in July 2021. Please refer to our earnings release for additional details on the GAAP to non-GAAP reconciliation. Q1 revenue was $61.4 million, up 23% from the prior year. Our strong growth reflects rising demand for our 5G mobile broadband and fixed wireless products and further uptake of our cloud solutions. Next-generation solutions, which comprise 5G devices and all our cloud software assets, increased by 68% over Q1 fiscal 2021 and represented 67% of total revenue this quarter, compared to 43% of revenue in the year-ago quarter. First-quarter IoT and mobile solution revenue was $54.5 million, up 27% from the same period last year. Our strong performance was again driven by demand for our 5G mobile hotspots from both our carrier partners and enterprises, partially offset by a decline in the sales of 4G devices. Enterprise SaaS solution revenue was $6.9 million, flat on a sequential and year-over-year basis. As Ashish noted, we're currently modernizing the architecture of our software assets and integrating them into our 5G Edge Cloud. Consolidated gross margin was 27.3%, up from 25.4% in Q4, but down from 31% in Q1 last year. Gross margin for the IoT and mobile business was 24.1%, down from 26.1 in the year-ago period, but up almost 200 basis points from 22.2 in the prior quarter. The gross margin decline from last year reflects higher freight costs, while the improvement on a sequential basis was driven by a more favorable mix of device sales. The gross margin for the enterprise SaaS segment was 53.3%, down sequentially from 58.2% and year-over-year from 62.5%. Q1 non-GAAP net loss was $12.1 million or $0.11 per share, down from $0.08 per share in both the prior and year-ago quarters. We reported an adjusted EBITDA loss of $3.3 million, which was down by $1.1 million and $2.1 million respectively compared to Q1 last year and last quarter. The change was largely due to lower levels of capitalized R&D relative to what we expense. Our overall cash spending on R&D remains consistent, and our investment in next-generation solutions is calibrated to our vision of ramping up the SaaS model over time. For additional details on our non-GAAP and adjusted EBITDA results, please refer to the reconciliation tables in our press release. Cash, cash equivalents, and restricted cash at the end of Q1 was $45.2 million. We note that our cash position benefited from the timing of some larger collections, which we expect to normalize this quarter and therefore lead to uses of cash in Q2 that is more consistent with our recent historical run rate. With that, let me turn it back to Ashish for his closing comments.

Thank you, Bob. Since taking over as CEO last quarter, I've had numerous conversations with our shareholders and the investment community. There's one thing I've consistently heard: the desire to see us move beyond the narrative of investing in the opportunity offered by 5G and to start executing consistently against our objectives for robust top-line growth and improved profitability. That is why we are being as transparent as possible in sharing with everyone the near-term challenges that we face. But as I said before, we believe these challenges will be measured in months, not quarters or years. I want to be clear on how excited I am about the opportunity that lies ahead in 5G for the enterprise. Inseego has become the leader in 5G Edge with our high-performance mobile adaptable FWA solutions. In the coming months, the pieces will be put in place for mainstream adoption as carriers evolve their 5G data plans and we move beyond renewed COVID lockdowns. We believe these factors, combined with our growing pipeline and expanding go-to-market strategy, will put us back on track to achieving our financial goals. Thank you for your interest in Inseego. Now let's go to Q&A.

Thank you. We will now begin the question-and-answer session. Today's first question comes from Lance Vitanza with Cowen and Company. Please go ahead.

Hey, guys. Thanks, and congratulations on a nice quarter. I guess I had a couple of questions. The first is, Ashish, you mentioned the China lockdowns could cause a bigger impact in Q2. I think you mentioned in particular with respect to new product launches. Could you provide any more color on maybe the magnitude of a delay, and is that revenue likely? I think you kind of addressed this in terms of the months rather than quarters commentary, but could you speak specifically to what you're seeing with those lockdowns? Is this revenue that you think likely gets pushed into the second half, or is there some risk that this revenue is lost forever for whatever reason?

Hey, Lance, nice talking to you; hope you're doing well. So yes, to answer your question, it really is slight delays I would say. We're kind of working through all of the partners out there in Asia as they juggle these lockdowns. It’s just uncertainty—that’s what I would say at this point. We will come back and provide more details as we see how things unfold. It could happen—that’s what I said. These delays could happen, but we are tightly managing them right now. It's just the overall global uncertainty as that kicked in through what’s happening with COVID in Asia. That’s why we're saying it’s a little bit of a delay. But beyond that, I mean, we're working through all the challenges we're seeing out there.

So on the last quarter, maybe the last couple of quarters, you guys obviously talked about an outlook for 2022 for 25% year-over-year growth, obviously, that’s sort of pro forma for the Ctrack South Africa sale. And I think you’d also have been expecting to be free cash flow positive by year-end. I know that there's a lot of uncertainties here. But just in terms of thinking about how we would model the best we can do at this point, would you be comfortable putting—should we be thinking more like a 15% year-over-year growth or more or less than that? And could you help us think about the magnitude of a potential, when you finish the year, where do you think you’ll be burning $10 million a year, burning more or less than that—something that we can put some goalposts around those two things would be great. And then I have one follow-up for Bob, if you don’t mind.

Lance, I will answer and then have Bob provide his input. So as I said earlier, to me, this is more of a delay than anything else, right? What I would say is that things come back online quickly in China. And as you know, the second point that I mentioned earlier in the remarks was the 5G data plans put in place by the leading carriers. We’re really ready to go; we’ve got the portfolio, we’ve got the products, and we are super excited about all the pipeline of opportunities we are working through with hundreds of enterprises right now. So to me, this is more of a delay. If I were to talk about how you model it, I would just say to model it as a delay versus the demand leaving us or anything like that. Bob?

Yes. Hopefully, that was helpful. Two things, on your previous question, I just wanted to reiterate. We don’t see any demand going away, so everything is viewed as in the delay bucket—not as an effort, it’s a win. Second, certainly, a lot of these challenges are bigger than any company, including the largest companies, like COVID supply chain shocks and things like that, and some delays rolling up a 5G new plans. With those headwinds, the way we think about it now is we’re seeing Q1 as a run rate. We will create greater clarity as we see through what's going on in technology. All our goals and aspirations, including the numbers you threw out, probably look to be reaffirmed in our next quarterly call and the fiscal year, call it the end of Q2 to the end of Q2 next year. We just want to be cautious due to global situations, especially with the technology giants having suspended guidance.

So that’s really helpful.

Yes, the markets are there, and the appetite we believe from our customers is there. It’s just delayed.

That’s really helpful. I think, Bob, just my last question before I turn it over to the next person. You mentioned the sequential improvement in gross margin. I may have missed the commentary; I’m actually referring to the release where you talked about the improvement in gross margin. Presumably, you’re referring to the non-GAAP basis versus Q4, which I think I went back and tried to do that calc; I think it was about a 200-basis point sequential improvement in gross margin on a non-GAAP basis. Is that correct?

That is correct. Yes. Go ahead.

Well, my question is, presumably that was entirely driven by mix shift with supply chain offsetting what would otherwise have been an even bigger improvement. Is that right? And if so, I’m wondering if you could maybe try to quantify for us how much the supply chain cost you, if it did cost you in terms of gross margin in the quarter.

I didn’t think about it this way. You are correct; we did have a really nice quarter with 5G products inside of the mix, which helped drive up margins. Second, I would say Q4 to Q1, our supply chain issues, both with freight and material costs, were relatively the same. So as that clears a bit, there will be further improvement from the reduction of those effects. But the mix is the big driver in the sequential quarter.

Any ability to pass on price increases either? Did you do it in the quarter at hand, or is there a chance that you could do that going forward or no? Is that really just going to show up as a gross margin influence in the near term?

Yes, Lance. We do that whenever possible, right? I mean, there are different segments of the markets you play in. Certain segments are more sensitive to price increases than others. So I would say we always try to take the opportunity, particularly in this environment, to make those changes, but it's not always possible—not for me, certainly.

Right. Okay. Thanks, guys.

Let me just add one thing, because I think it’s relevant to your question, Lance. So thank you for your very good questions. The other way to get more mix in what we've achieved is more 5G inside of our mix. The second thing we’re looking forward to as a company is greater penetration into the enterprise space, which we think will bring additional margin enhancement, including some greater software attachment, which even though it's a SaaS basis over time will bring certainly greater and higher margins over that extended rolling period of time.

Thanks for your help, guys. Appreciate it.

Thank you, Lance.

And your next question today comes from Mike Latimore at Northland Capital. Please go ahead.

Hi, this is Aditya representing Mike Latimore. Can you provide some insights on whether you anticipate that rising inflation will impact consumer spending in your product areas?

Nice talking to you. So look, first off, the majority of our product goes into enterprises. So we don’t really—we’re not really seeing any impacts of inflation at this point.

All right. And did you have to 10 percentage customers again in this quarter?

Yes, that’s correct.

All right. And also what quarterly revenue, you think you can achieve to become free cash flow positive?

To be fair with what we've presented in the past, we have not given that number out. We would like to do—and it builds on what Lance asked earlier—is to come back in Q2 with hopefully some version of a reaffirmation of what we were previously guiding. We’d like to get clarity on the whole technology space, supply chain, COVID lockdowns, and those, and then come back in Q2 and provide greater clarity for you.

All right. Thank you.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Ashish Sharma for closing remarks.

Thank you, operator. And thank you, everyone, for joining us on the call today. We look forward to seeing you at upcoming investor conferences, including Stifel and Cowen in June, and updating you all next quarter on our continued progress. Thank you again.

Thank you, sir. And we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.