Inseego Corp. Q2 FY2022 Earnings Call

Hello, and welcome to Inseego Corp's Second Quarter 2022 Financial Results Conference Call. Please note today's event is being recorded. All participants today 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. At this time, I would like to turn the call over to Ashish Sharma, CEO. Please go ahead.

Thank you, operator, and welcome to Inseego’s second quarter fiscal 2022 earnings call. We had a solid quarter with revenue of $61.9 million, and an adjusted EBITDA loss of $1 million. Importantly, we saw our gross margin improve to 29.5% in Q2. This is a reflection of our long-standing focus on 5G products and improving our mix towards higher-margin recurring revenue. From a business perspective, what we are most excited about is that we have started to see several enterprise customers convert 5G pilots into full-fledged large multi-location deployments. This progress within our enterprise business and our growing pipeline of opportunities are a few of the key things that underpin our confidence in a strong second half of this year. Before highlighting how our business is evolving, I want to touch on a few things. First is our drive to generate positive free cash flow. We remain disciplined with respect to investments in our business and anticipate improved operating leverage now that we have a number of key product certifications behind us. Further, between the growth in our higher-margin businesses and a keen eye on our costs, we can see Inseego approaching free cash flow breakeven by the end of this year. Second is the importance of the $50 million credit facility we just closed. This facility gives us ample capacity to fuel the growth we see later this year and into 2023. Bob will touch on both of these shortly. Lastly, we believe 2022 represents a positive inflection point in our business. For the last few years, we have discussed the promise of 5G and the impact it will have on end customers. While it has taken longer than we would like, we are finally starting to see that promise become a reality. We see this from two perspectives, from our carrier partners as their 5G network coverage improves dramatically, and from end-user customers who can now benefit from these high-speed networks and are making purchase decisions for 5G deployments. Our broad suite of 5G solutions positions us well to capitalize on the long-term trends we expect to play out over the next five years. So on to the exciting developments we are seeing in our enterprise business. There are two key drivers. First, are the new C-band rollouts, which many believe create an ideal balance of range, penetration, and speed for carriers and their customers. This allows 5G to solve last-mile issues with much more network capacity in areas where fiber just isn't feasible. This is critical for businesses with distributed sites and workforces. We are certified for the C-band rollouts with all the major carriers in the US, and we are collaborating to bring these services to enterprise customers. Second is the introduction of new cost-effective 5G data plans for businesses. As an example, we saw that T-Mobile announced their new 5G for business data plans in May of this year. This is proving to be a significant catalyst for enterprise adoption of 5G for fixed wireless access. Now let me outline the progress through the three different routes to market we are pursuing. First is our stock business. This is where T-Mobile purchases our products directly and delivers them to their customers. We are already seeing significant customer activity through this effort and continue to build a new pipeline of opportunities. As a reminder, our Wavemaker 5G indoor router FX2000 has been stacked and available to T-Mobile's business customers since November of last year. Recently, we have seen activity levels increase dramatically. Also, we've had Fortune 500 retail customers convert from pilots to full-scale deployments. Moving forward, we expect our pipeline to continue to grow with improved sell-through as T-Mobile sales teams reach more end customers. This will result in significant restocking of the FX2000 with T-Mobile over the balance of the year. Second is what we call sell with, where we jointly sell our entire 5G FWA portfolio alongside T-Mobile sales force. We have sold our product to over 400 distinct new customers since the launch. As many of you are aware, our ability to capture new enterprise customers has the potential to completely transform our business. How? Simply put, these sales carry significantly higher product margins than when sold under the stock program. Most importantly, these sales also have very high software attach rates. This means, we can earn recurring revenue each month for every device over a multiyear contract period. Capturing our fair share of this emerging enterprise 5G FWA market is one of the ways we see Inseego delivering increased revenue growth, improved gross margins, and sustainable positive free cash flow. And third is our VAR channel. As previously mentioned, C-band delivers much more capacity for bandwidth-intensive business applications. This makes the availability of C-band a key driver for FWA adoption here in the US. Importantly, we now have multiple 5G FW products certified with both AT&T and Verizon. Working with their top VAR partners, we have started shipping initial orders and have already started to build a large pipeline of enterprise opportunities with both of these carrier customers. We believe we are the only company with such a broad portfolio of purpose-built 5G FWA products that are C-band certified. This places us in a very unique position in the market. So that's how we go to market. Now, let me touch upon some examples of 5G enterprise FWA use cases, so you can better understand the scope and scale of the opportunity. Now, where are we seeing traction? It's in the verticals where there is a need for primary connectivity for remote workforce, branch office connectivity, distributed sites, and security and remote management. That means construction, retail, healthcare, education, utilities, manufacturing, and logistics. In the construction sector, for example, we are seeing interest from national homebuilders where our 5G FWA solutions are ideal for remote work sites and development projects in the field where fiber just isn't available. In the retail sector, a handful of nationwide and regional customers have trialed our products and are now commencing rollouts. These deployments can range in size from hundreds of locations to thousands. Another prospective customer with an employee base of 120,000 is preparing to test our solutions for their remote workforce. Then we have a large national retail chain and a leading car rental agency trialing our solutions for secure and reliable primary connectivity in both rural and urban settings. In Europe, we are now in a pilot with a smart traffic light manufacturer, a leading gas supplier who is leveraging our solutions to manage remote sites, and a large paper and recycling company to enable their smart warehouse initiatives. Let's turn our focus to our expanded software portfolio. Building upon our best-in-class portfolio of 5G fixed wireless devices, we recently launched our 5G SD EDGE solution. This expands our software capabilities beyond cloud management to complete corporate IT management. With Inseego's 5G SD EDGE, enterprises now have the tools to secure, automate, and orchestrate the management of their wireless wide area networks, much like they do with their wired WANs. While WWAN was primarily used for backup connectivity in the 4G world, 5G offers significantly more capacity, which combined with an increasing need for segregated networks and workflows to combat security threats will drive significant adoption of 5G WWAN for primary connectivity. We believe this solution will offer a much more simplified approach to enhance security and network policy management compared to traditional on-premise WAN management solutions. We are already in pilots with multiple customers, and we expect our first launch customers this quarter, much like our other software offerings attaching 5G SD EDGE to our enterprise sales will further increase our subscription revenue streams, increase customer stickiness, and expand our gross margin. Of course, you will have plenty more to talk about as it leads to our software stack in time. This includes our ongoing efforts to enhance and integrate our existing Ctrack applications into our 5G edge cloud. Before I turn it over to Bob, I just want to mention one more important launch. While our growth aspirations are clearly aligned with enterprise adoption of 5G FWA, we continue to deliver new innovations and best-in-class mobile connectivity products to market, as we've always done. We are launching the MiFi X PRO. This marks the third generation of our 5G mobile hotspot and the company's 10th generation MiFi since inception. A Tier 1 carrier in North America will be the first customer to roll out this product in Q3. I'm also very happy to report that another Tier 1 carrier, Telstra in Australia will be launching this solution soon as well. Our mobile hotspot product line continues to be the preferred choice for business customers looking to power their mobile workforce. This is primarily due to the industry's best performance and advanced security we provide in our hotspots. I want to thank our employees for their dedication and pursuit of our strategic imperatives. And I would now like to turn the call over to Bob, who will provide more details on our Q2 results.

Thank you, Ashish. Let me now review the results of our second quarter fiscal 2022. Please note that all metrics and comparisons made are non-GAAP on a pro forma basis, adjusting for the divestiture of Ctrack South Africa, which was completed in July 2021. Please refer to our earnings release for additional details on the GAAP to non-GAAP reconciliation. Q2 revenue was $61.9 million, up 6% from the prior year and up slightly on a sequential basis. Our growth reflects continued strong demand for our 5G solutions and increasing traction with enterprises, particularly offset by anticipated declines in 4G products sold directly to our carriers. Next-generation solutions, which comprise 5G devices and all of our cloud software assets, increased 25% over Q2 fiscal 2021 and represented 66% of total revenue in this quarter compared with 50% of revenue in the year-ago quarter. Second quarter IoT & Mobile Solutions revenue was $55.2 million, up 7% from the same period last year. Similar to Q1, our growth was again driven by demand for our 5G mobile hotspots, further uptake of our solutions by enterprise customers, and steady growth in our attached software revenue, which was partially offset by declines in our 4G product sales. Enterprise SaaS solutions revenue was $6.7 million, which was relatively flat on a sequential and year-to-year basis. As noted last quarter, we are in the process of enhancing our software assets and integrating them into our 5G edge cloud. Consolidated gross margin was 29.5%, up from 27.3% in Q1 and 28% in Q2 of last year. Gross margin for IoT and mobile business was 27.4%, an increase of over 300 basis points from 23.9% in the prior period and 24% in the prior quarter. The gross margin improvement on both a sequential and year-over-year basis reflects a higher mix of enterprise sales. Gross margin for the Enterprise SaaS segment was 47.8%. Q2 non-GAAP net loss was $9.5 million or $0.09 per share, an improvement from a loss of $0.11 per share in the prior quarter and a loss of $0.08 per share in the year-ago quarter. We reported an adjusted EBITDA loss of $1 million, which was up from a loss of $3.3 million in Q1 and a $1.7 million loss in the year-ago period. The change was largely due to the combination of higher revenue and gross margin arising from our increasing mix of enterprise sales. 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 Q2 were $24.4 million. We note that our cash balance last quarter was bolstered by an early payment by a carrier customer. This quarter, our receivables returned to a more normalized level, and we significantly reduced our accounts payable balance. For the balance of the year, we expect our quarterly cash usage to be significantly lower than in Q2, as our revenue growth reaccelerates, and we remain disciplined with our investments in operating costs. As Ashish mentioned, we're making significant strides toward our goal of being free cash flow positive and expect to approach breakeven by the end of 2022. We believe our current cash position is sufficient to carry us through the transformation to an enterprise 5G company, but also want to ensure we have substantial financial flexibility. As announced today, we have closed on a working capital line of credit that provides us with up to $50 million in liquidity, of which $4.5 million was drawn at closing. This facility was available to us based on the nature of our receivables being largely from high-quality investment-grade customers with long tenures and with seller payment records, as well as the quality of our inventory. This line of credit provides us flexibility to support our customers and the growth we expect this year and into 2023. With that, let me turn it back to Ashish for his closing comments.

As I hope you can see from our comments, the promise of 5G is becoming a reality, and we are uniquely positioned to capitalize on its rollout for years to come. We are focused on continuing to provide best-in-class solutions to our carrier partners and increasingly to enterprise customers through our 5G FWA and software solutions. We made continued progress against our key initiatives in Q2 and with our key carrier partners now starting to turn their attention to 5G enterprise FWA and the successful launch of our next generation of 5G products. We are primed for a strong second half of 2022. As more and more of our enterprise pipeline moves towards purchase and deployment in the coming quarters, we expect to benefit from a high attach rate of software sales, which will ultimately help us to continue to improve margins and profitability as we generate positive cash flow. Inseego is at an inflection point, and we look forward to keeping you updated on our progress in future quarters. Before we move on to the Q&A, I'm very pleased to announce that Jeffrey Tuder has been elected Chairman of the Board. Jeff's extensive industry knowledge, combined with his unwavering integrity and expert judgment, have been invaluable since he joined the Inseego Board in 2017. Jeff is the perfect choice for Chairman of the Board, and I'm confident that he can help lead the company into the future. Now let's go to Q&A.

We will now begin the question-and-answer session. Today's first question comes from Tore Svanberg with Stifel. Please proceed.

Yes. Thank you. And congratulations on the continuous progress here. Ashish, I know it's hard to quantify, obviously, the second half, but you referenced a very strong second half. Can you put some numbers or certain metrics around that? And maybe as related to that, what would be the breakeven point given the higher gross margin now?

Hey, Tore. Hope you're well. Good talking to you. Look, this is the business transformation that we've all been waiting for, right? And this quarter, you start to see us move to the next phase of the company where you can clearly see the margin bump we got with our new enterprise business that we've been working for quite some time to establish. We've had the portfolio and the products ready for quite some time. And now, with the carriers pushing on the new 5G FWA plans, particularly targeted at enterprises, you start to see those results come through. This is the main driver alongside the next-gen hotspot launches that's making us so optimistic about the second half of this year. And regarding your second question about at what levels we get to breakeven, it's still a very early 5G market. We've got a lot of customer traction. Enterprise customers are loving the product, but they're all individually still assessing and determining their own plans on how to roll out the deployment. We started to see some do it this quarter, which is reflected in the results. It's hard to pinpoint a fixed number, but directionally, if we maintain the same pace as this quarter, then we're very comfortable that by the end of this year, we'll be getting very close to breakeven on positive cash flow.

Very good. And as a follow-up, the IoT and mobile business, about $55 million. Can you give us a sense for the mix there now between both 4G versus 5G and also what the percentage is related to enterprise?

Yes. I would say, Tore, the majority of the enterprise revenue is on 5G. There's a very small portion in there for 4G. Most of the revenue there is really from hotspots. So I would say that the growth we are seeing is in the right area; it is with 5G and it is with FWA. And in this quarter, it has been pretty steady with what we've seen in the previous quarters.

Very good. Just one last question for Bob. Bob, the inventory obviously was up quite a bit. You had 98 days right now. And I was just hoping you could talk about that particular build. Is this in anticipation of the second half or is there anything else sort of other moving parts going on there?

I think there's a couple of things, Tore, and thank you. First, we don't want to signal an anticipatory large ramp. Certainly, we can't wait for that to happen. But we've moved a lot of our shipping to better manage our cost stack back to ocean, and so what that has done is temporarily slowed the pace of inventory coming in. But we believe that cost trade-off is beneficial to our margins.

Great. Thank you very much.

Thank you, Tore.

Our next question comes from Scott Searles with ROTH Capital. Please proceed.

Hey good afternoon. Thanks for taking my questions. Maybe to follow up on Tore's question, Ashish. In terms of the visibility and the outlook, is there anything that you could help us quantify in terms of what you're seeing that backlog or that pipeline, in terms of the size, magnitude, number of customers, maybe the size of deals, and particularly on the enterprise front? And then I had a couple of follow-ups.

Okay. Hey, Scott, good talking to you. So a couple of data points I can provide. The size of the pipeline through the three different routes to market we have is now tripled or quadrupled since we last spoke. We're on a very fast pace of getting products out to numerous customers and engaging them in trials and pilots and starting to convert them into full deployments. So that's one number. I would say the pipeline is super strong. There's a lot of interest. I would just say that the networks we are seeing—the C-band network from Verizon and AT&T, and the mid-band network from T-Mobile—are incredible. The performance is just simply outstanding. This provides us with a great view into what's to come in the second half of the year and then moving into next year. I would say the opportunity size could vary; from small units for trials to a couple of hundred units for pilots, to a few thousand units—including one notable customer with 100,000 employees. That gives us a significant work-from-remote solution opportunity. The pipeline consists of a variety of customer sizes, and we've closed some initial customers in Q2 with very sizable opportunities rolling out 5G FWA at thousands of their locations throughout this year.

Okay. Very helpful. And Ashish, if I could follow up on that. Just in terms of the sales cycle there and deployment cycle. Could you help us— it sounds like things are accelerating—but is there a timeline you would put around that in terms of the digestion period now? Is it 90 days? Is it 180 days? Is it compressing then going forward?

Yes. I would say that the purchasing decision could be made anywhere from 30 days to several months. It really depends on the purpose of the rollouts, and there are different purposes each customer has. But generally, I would say, on average, customers are moving from pilots into full deployments between three to six months.

Okay. Great. And if I could, just on the financial front, Bob, any 10% customers in the quarter? I know you typically had big numbers from Verizon and T-Mobile. I'm wondering what the percentages were there? And on the OpEx front, R&D has come down. Is that the sustained level that we should be assuming, or is there a bit of an inflection? Because I know I think software capitalization has kind of bottomed out now at a lower level. I'm assuming that there are no changes on that front, or how should we be thinking about R&D going forward into the second half? Thanks.

Yes. Thanks, Scott. I'll start with your first question. We still have the same two customers you mentioned, Verizon and T-Mobile, both over 10%. So not much different than what we've seen in the past. Those combined generally account for over 50%, so that's been a consistent pattern. With respect to R&D, yes, we've managed our expenses well. In prior calls, we talked about significant reinvestment for the 5G opportunity. We've done that, and our new R&D spend rate reflects that. I consider this the new normal. We are not looking for any inflections upward. If anything, there may be slight moderation down as we digest what we've already done. Additionally, as the company grows, not much new OpEx will be required, allowing us to drive bottom-line improvement and cash generation.

Great. Thanks so much. I'll get back in the queue.

Thanks, Scott.

Our next question comes from Mike Walkley with Canaccord Genuity. Please proceed.

Thanks for taking my question. Good to see a little uptick on the gross margins with the mix. Just building on that, longer term, where do you see maybe fixed wireless as a mix relative to hotspots versus where it is today? And as that changes, where could gross margins trend to from the current business run rate?

Hey, Mike, this is Ashish. So let me address that. We're just beginning this journey. We've been preparing for this for the last couple of years. We made the investments and built the portfolio. We believe the size of the market in the enterprise sector is significantly larger than what we've had access to before with the hotspots. We see the 5G FWA enterprise market as a great opportunity. We just saw one large carrier ramping up on FWA, and Verizon is also coming back strongly with C-Band and their build-out plans. International markets are tracking a bit behind but will come online over the next twelve months. FWA is becoming more meaningful for us. It's not just the size of the market from a hardware perspective; the ability to sell a complete stack is key. We can sell cloud solutions on top, along with our new 5G SD EDGE solution, which offers security and enterprise management. This gives us a great growth opportunity, which is starting to happen now, and we expect steady increases each quarter.

Great, thanks. Just build on that. How do you view your competitors in that market? You have Cradlepoint, who was bought by Ericsson, going after some of the same enterprises. You talked about Serwireless, which just launched their 5G router and gateway business. So how do you view the competition? And what's the feedback on why you are differentiated and winning some early business?

Yeah. Great question, Mike. First, by the nature of a sizable market that's emerging, there will be a lot of competition, and that's great. It's good to have a sizable market to participate in. A couple of the competitors you mentioned have slightly different focuses than the approach we provide to those customers. Our differentiation lies in several areas: we produce the best modem in the industry, always incorporating the latest 5G technology at competitive price points for enterprises. We do not build outdated SD-WAN boxes with heavy processors; instead, we create a very efficient edge that performs exceptionally well, providing access to the best 5G networks. Moreover, our 5G SD EDGE solution represents a major market disruptor with unmatched value propositions compared to others. The combination of security and distributed networking solutions we offer is unparalleled.

That's great. And last question for me. You touched on it earlier with T-Mobile on pricing. Can you just talk about the carriers and what you're seeing in terms of how they're going to price it to the enterprise and that timing of when it might help the market take off faster?

Yes, Mike, that's already started. In Q2, T-Mobile released several strong business plans, and this has been a catalyst for the progress we saw this quarter. Verizon has also done the same. We're seeing other carriers, both domestically and internationally, working on these plans, which are directly tied to their rollout of mid-band and upper-band spectrum. They're investing in more compelling plans, and early signs are looking favorable. The opportunity is substantial, and the performance of networks on mid-band is exceptional.

Okay. Thanks. One last one, I'll pass it on. Just any supply issues to worry about in the second half, or do you feel pretty good about availability to meet your second-half ramp potential?

No issues, Mike. While we continue to operate in an elevated cost supply chain environment, our operations team has done exceptionally well managing the supply chain. This is why many of our carrier customers appreciate us; we've always been able to provide the product and managed the supply chain effectively from the start of the pandemic.

Great. Thanks for taking my questions.

Thank you, Mike.

At this time, we are showing no further questions in the queue. And this concludes our question-and-answer session. I would now like to turn the conference back over to Ashish Sharma for any closing remarks.

Thank you, operator, and thank you, everyone, for joining us on the call today. We look forward to updating you all next quarter on our continued progress. Thank you again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.