Inseego Corp. Q3 FY2022 Earnings Call

Hello, and welcome to Inseego Corp's Third Quarter 2022 Financial Results Conference Call. Please note that 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. I would like to turn the call over to Ashish Sharma, Chief Executive Officer. Please go ahead.

Thank you, operator and welcome to Inseego’s third quarter fiscal 2022 earnings call. As mentioned in previous calls, Inseego is currently in a transitional phase. We shifted from being a company solely focused on designing and manufacturing hotspots to one that leverages core technologies to provide a full suite of connectivity and mobility solutions to enterprises via our fixed wireless and SD-WAN products. Our results this quarter reflect this transition and we believe we are on the right path. We delivered a strong topline performance this quarter with revenue of $69.2 million. This level of activity met our expectations on revenue. In the quarter, we benefited from initial volume shipments of our next-generation hotspot, MiFi X PRO to Verizon in the US and Telstra in Australia. While this is an important validation of our products, as you may have heard us say, the stock carrier business carries lower gross margins, which is a contributor to why we saw our gross margin tick down this quarter. Our adjusted EBITDA was a loss of $2.5 million. EBITDA was lower than we anticipated due to the ongoing impact of higher supply chain costs and a non-cash adjustment to previously capitalized development expenses that elevated reported R&D in the quarter. The majority of these costs were nonrecurring in nature. So, we expect our gross margin to rebound and our reported R&D expenses to decline in short order. In Q3, our 5G revenue increased 22% year-over-year and now comprises 49% of total revenue. Our software solutions represented 21% of total revenue in Q3. Both of these metrics are important as we transition the company and move towards our financial targets. In Q3, we made good progress towards our most important goal of approaching cash flow breakeven by year-end. This progress was driven by the initial ramp of our enterprise FWA business. That business now accounts for over 13% of our revenue and importantly, boasts a much stronger margin profile than our traditional hotspot business. We've now sold 5G products to over 600 enterprises this year, with our enterprise base exceeding 1,000 customers, all in various stages of deploying 5G. Many of these enterprises follow the same path, purchasing and testing 20 to 50 Inseego devices to test and evaluate, with the goal of deploying devices along with our software across their entire footprint. These deployments are mission-critical, with full deployment occurring over multiple quarters. And it is also important to note that the vast majority of these wins are coming at the expense of competitors such as Cisco and ClearPoint. We've also added many new enterprise customers to the list of ongoing pilots. Thanks to the breadth of our 5G portfolio, we're seeing a trend of more and more customers tuning to Inseego over the competition. Before I provide additional Q3 highlights, I want to share three reasons why we are confident we will approach cash flow breakeven by the end of this year. First, as many of you know, we've made substantial investments in product development and go-to-market initiatives over the past few years. This positions Inseego as the leading provider of best-in-class 5G Fixed Wireless Access or FWA solutions to enterprises. Second, we continue to tightly manage all of our costs. We've already removed close to $20 million from the business's annual run rate year-to-date and will continue to remain dedicated to our free cash flow goals no matter what 2023 will look like. On the R&D side, we have completed several key mid-band certifications over the past two quarters that will enable us to lower expenses going forward. Third, the dramatic increases in the available spectrum and network performance made possible by 5G will give rise to a host of new enterprise service offerings, and we are hearing this in all of our dialogues with our Tier 1 carrier partners. Lastly, our carrier partners are only now beginning to roll out meaningful enterprise-focused FWA services and the plans to support them are becoming more commonplace. We expect to see real expansion of this in 2023. So let's get into some examples of the customer momentum we saw in the quarter. We won a new customer in the commercial real estate sector. They cut the cord with the local cable ISP once they tested our outdoor 5G FWA solutions and experienced upload speeds of 151 Mbps. That's correct. I said upload. Another example of a new customer we recently secured is a well-known car wash chain based in the Midwest. As with all retailers, consistent uptime for video surveillance and payment transactions is paramount. The customer was facing challenges with the satellite communications they were using as it could not deliver reliable performance in inclement weather, which compromises their uptime. After successful testing in a number of locations, our 5G FWA solution was selected for primary connectivity, replacing their existing satellite ISP services. On the carrier side, in addition to our Telstra launch in Australia, we expanded our relationship with Drei Austria, part of the three group companies. They launched our Wavemaker™ FG2000 indoor solution for their business customers during the quarter. I also want to address our investments in inventory. These have been a headwind to cash flow generation and are now beginning to moderate, as you can see in our inventory position exiting Q3. Given the challenging supply chain with long lead times for many constrained components over the last couple of years, we increased our inventory position significantly over the past few quarters. This was done to ensure we have adequate supply to meet our customers' needs in this newly developing 5G FWA market. We believe that build has plateaued and we will be able to sustain a downward trend and manage new demand without major cash needs. Considering the progress we've made on all fronts, we remain on track to approach cash flow breakeven by year-end. Most importantly, we are poised to generate positive free cash flow in the first quarter of 2023 and expect to remain positive thereafter. I want to thank our employees and customers for their continued support. And I would now like to turn the call over to Bob, who will provide more details on our Q3 results.

Thank you, Ashish. Let me now review the results of our third 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. Q3 revenue was $69.2 million, up 9% from the prior year and up 12% on a sequential basis. Our growth reflects higher-than-anticipated sales of our new MiFi X Pro product, partially offset by anticipated declines in 4G products sold to carriers. Next-generation solutions, which are comprised of 5G devices and all of our cloud software assets, increased 19% over Q3 fiscal 2021 and represented 70% of total revenue in this quarter as compared to 62% of the revenue in the year-ago quarter. Third quarter IoT & Mobile Solutions revenue was $62.6 million, up 10.1% from the same period last year. Our growth was primarily driven by the launch of the MiFi X Pro hotspot and further uptake of our solutions by enterprise customers, which Ashish mentioned, comprised over 13% of our revenue in Q3. Enterprise SaaS solutions revenue was $6.5 million, representing a slight decline on a sequential and year-over-year basis. Consolidated gross margin was 26.3% and down from 29.5% in Q2 and 28.2% in Q3 of last year. Gross margin for the IoT and mobile business was 23.4% and down from 24.4% in the prior year period and 27.3% in the prior quarter. The lower gross margin on a sequential basis was attributable to a significantly higher mix of hotspot revenue, which had a lower contribution margin than we've seen of late due to higher component and distribution costs associated with the initial launch of our MiFi X Pro product. The majority of these costs are not expected to recur in Q4 and beyond, meaning margins on our carrier product should rebound in the coming quarters. Also worth noting, gross margin on our enterprise FWA sales remained robust in Q3, exceeding 40%, which leaves us confident that our gross margin has ample room for expansion as we continue to scale our enterprise business. Gross margin for the Enterprise SaaS segment was 54.1%, relatively consistent with the past two quarters. Q3 non-GAAP net loss was $12.4 million or $0.11 per share compared with a loss of $0.09 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 a negative $2.5 million, which was up from a loss of $1 million in Q2 and a loss of $800,000 in the year-ago period. The change was largely due to the supply chain costs alluded to earlier and higher-than-anticipated levels of R&D this quarter, which included a one-time non-cash adjustment of $700,000 related to capitalized software expenses that incurred in prior periods and also higher certification costs that will abate as we now have completed a major product launch and obtained key certifications from our carrier partners. 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 Q3 was $18.1 million. Our cash usage improved from the prior quarter, while working capital consumed additional cash due to the timing of orders. For the remainder of the year, we expect our quarterly cash usage to trend lower and approach cash flow breakeven. We believe this will leave us well-positioned to generate positive cash flow on a sustained basis during 2023. We note that our expectation for generating positive cash flow next year is predicated upon a steady ramp in our enterprise fixed wireless revenue and growth in our 5G carrier hotspot sales, offset by the anticipated decline in our 4G product sales. As mentioned previously, we continue to focus on cost and ensuring we are cash flow positive next year. We continue to prioritize growth in our higher-margin enterprise sales, which we believe will have a transformative impact on our business by increasing our mix of recurring revenue, expanding our margins, and ultimately, sustaining strong free cash flow over the long term. With that, let me turn it back to Ashish for his closing comments.

Thanks, Bob. So, the key takeaway from our Q3 update is that we saw steady progress against our key initiatives and we continue to approach an inflection point in our business. As the availability of 5G enterprise FWA offerings become more prevalent, we are well-positioned to benefit from the growing demand for our products. In parallel, our cloud-based software solutions have a high attach rate providing us with a high-margin recurring revenue stream. This enterprise growth layered on top of our existing cost structure will ultimately transform Inseego into a high-growth company with sustained profitability and positive cash flow. Thank you all for your interest and support. We look forward to taking your questions.

We will now begin the question-and-answer session. Our first question will come from Lance Vitanza with Cowen & Company. Please go ahead.

Hi everyone, thank you for taking my questions. I have three areas I’d like to discuss. First, regarding revenue, IoT services saw an increase of about $5 million to $6 million year-on-year, which is roughly a 10% rise. Could you provide more details on how this increase breaks down between new hotspots, software, and the differences between 5G and 4G in terms of pricing and volume? Any additional insights on these categories would be appreciated.

Lance, great talking to you. This is Ashish. So, let me take that. So, first, good question. I would say there are two components of increase year-over-year in that revenue. One is the new hotspot launch we've had with a new customer in Telstra in Australia. I would say that's net new revenue. And then number two, I would say the continued growth in our enterprise FWA revenue, that's all bucketed in that IoT and mobile revenue. So I would say those were the two main components.

Are you noticing any changes in unit pricing on either side? Should we consider this as a straightforward increase in the number of units sold, or is there also a pricing element involved?

Let me take a step back. Since I became CEO earlier this year, we conducted a thorough review of all our businesses. We shifted our focus from seeking all types of revenue growth to prioritizing the quality of revenue and cash flow generation. Currently, our top priority is to grow the enterprise Fixed Wireless Access (FWA) business, which is part of the increase you mentioned. The margins there are significantly higher, starting with over 40 percent margins. That is reflected in our revenue. On the hotspot side, we are focused on generating revenue from carefully selected carrier partners rather than pursuing every carrier with low-margin business, as hotspots typically have lower margins compared to the enterprise FWA business. While we saw an increase in revenue from hotspots this quarter, it did affect our margins due to elevated supply chain costs, especially since it was a new product that required full operational capability. We are facing higher shipping and component costs. As we continue to grow our enterprise FWA revenue, you'll start to see a shift in margins beyond what we currently see.

Okay, great. That answers most of my questions about gross margin, but I wanted to follow up. You mentioned the elevated supply chain costs this quarter. I'm curious if you have any ability to pass some of those increased costs onto your customers, similar to what many companies we follow do. Is it that the market is just too competitive for you to implement this, or is it more about the temporary nature of the cost increase that didn’t allow you the time to recover those costs? How should we consider this going forward? Thanks.

Yes. Good question, Lance. So, on the enterprise product side, we have done all of that, right? We have increased the pricing, but it is still a smaller piece of our revenue, even though it grew to 13% of the quarterly revenue this time. On the hotspot side, it is a very competitive market even for our carrier customers; they have certain slots out there and there's a pricing and elasticity of volume with pricing on those slots. Therefore, it is super challenging for us to pass on those costs. We have surgically gone ahead and, in some cases, with the customer's consent, increased the pricing. But still, as I said, there was just too much hotspot revenue this quarter that shifted the margins downwards given that, in general, the margins and hotspots are quite lower compared to the enterprise FWA margins.

Okay, understood. Lastly, regarding the margin, I appreciate the detailed explanation about the non-recurring cost items that arose. It appears these emerged quite late in the quarter. I don’t remember you mentioning them during our call three months ago. My question is, do you feel confident about your visibility at this moment concerning the fourth quarter and the potential for margin improvement, or should we be concerned that there may be additional one-time items that could appear over the next couple of months?

Yes, Lance. Given that the launches of the new product, at least two big ones were executed this quarter, we are fairly confident that we're going to see improved margins next quarter. I don't see those types of headwinds hitting us again.

Okay. Shifting gears, I'd like to discuss the balance sheet. Given your connection with Foxconn, I assume your minimum cash balance is fairly low. Can you elaborate on that? How much cash do you think you need to maintain for operations? Additionally, while it’s still early, could you outline your plans for the convertible note maturity in May 2025? Thank you.

Yes, Lance. So let me give a high-level overview there, and then I'll ask Bob to chime in here. So three things I want to highlight, right? One, we took out $20 million in costs this year as a run rate already. So that's one. Number two, is the inventory, as I mentioned in the script, we were running pretty high on inventory, given the long lead times and trying to just really manage the supply chain cost by putting items on the boat and pre-buying with long lead times. That is moderating now, and that's going to trend downwards. So it will alleviate pressure on spending more cash. So that's number two. The most important thing is, we are seeing a lot of traction in our enterprise FWA business, with hundreds of new customers signed up this year with higher margin revenue. So a combination of those three, Bob's team has conducted very detailed modeling. We're fairly confident with the cash and the revolver we've got. We don't plan to use the revolver for our cash needs. It's mostly for some working capital changes in the quarter, we go through here and there. But we'll be able to manage the business pretty tightly moving forward with those three different strategies I talked about. So Bob, if you have anything to add.

Yes. Hello, Lance. The only thing that I would add, and you've been with us, so you know this, the heavy investment in the two transitions—the transition to fixed wireless and having the correct portfolio position, and then the transition from earlier or previous generation 4G and even previous generation 5G to new generation 5G and the hotspots. We've already made those investments. So first, from the investment need, we feel very good that we are going to spend some money, but the heavy lift is behind us. Second, we wanted to avoid what some other companies faced, which was stockouts and limitations on what they could supply. If anything, we intentionally increased our inventory to ensure clarity in demand cycle expectations, and we'll moderate those down. Ashish also mentioned the cost; it was not about needing fewer resources. This is not a company full of waste. Instead, it's a company that invested heavily in what they saw as a great 5G opportunity. As such, we now have that behind us, allowing us to reduce costs without cutting essential resources. Hopefully, that helps, Lance.

Thanks, guys. Appreciate it.

The next question will come from Mike Latimore with Northland Capital. Please go ahead.

Hi. This is Aditya on behalf of Mike Latimore. Could you tell me what was international as a percentage of revenue?

So, one thing I would say is that traditionally, we have not broken out our international revenue as a percentage. This quarter, I would say, given the significant launch with Telstra, it was a substantial part of the revenue.

Yes, I would say we don't provide that specific detail, but it was over 10%. We took advantage of a good opportunity with Telstra, and we satisfied that.

Alright. Thanks. And could you give some color on if you're seeing any hesitancy among the enterprise buyers given the macroeconomic concerns?

Good question. From our perspective, 5G has quite a bit of momentum in the enterprise and SMB market because during the pandemic, broadband access became a lifeline for many businesses. So, we see this as essential services that every enterprise and employee needs access to. 5G provides a completely untethered capability based on location, irrespective of where employees are. Thus, we're not seeing any slowdown from enterprises on evaluating and continuing to deploy 5G.

Alright. Thanks. That’s helpful. Thank you.

Thank you, Aditya.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Ashish Sharma for any closing remarks.

Hey, good afternoon. Thanks for taking the questions. Ashish, I apologize, you probably covered this earlier in the call, but I just hopped on. Could you take us through the gross margin impact headwinds on that front, I'm sure from component availability as well as some of the logistics issues? Can you take us through kind of where we are today and how you see that progressing over the next couple of quarters? And give us a quick update in terms of how the supply chain impact is looking right now?

Yeah. Hey, Scott, nice talking to you. Thanks for the question. So, on the gross margin front, we had a couple of things occurring this quarter. One, positively, our enterprise FWA business grew quite a bit at the end of this quarter, and it's now 13% of overall revenue, which is all very high margin revenue, over 40%. However, we also had significant stocking orders from a couple of large hotspot launches we completed this quarter. That affected the margins because the hotspots were facing increased supply chain costs given that they were new launches; we had to order materials well in advance. Moving forward, irrespective of this quarter's gross margin, we're confident that we will improve the gross margin next quarter. We do not see those challenges repeating again. Moreover, we’re focusing on free cash flow generation into Q1 and getting close to cash flow breakeven this quarter. This is primarily driven by three factors: first, the growth in our enterprise FWA revenue, which is a great highlight; second, we took out over $20 million in costs from the business, given our focus on quality revenue over quantity; and third, this new hotspot was launched this quarter, so we're not facing the same supply chain pressures we did previously. That summarizes our views on margin and cash flow.

Perfect. And Ashish, if I could just follow up on the fixed wireless access comment, 13% is a big number in the September quarter. Could you calibrate us in terms of what it was in the June quarter? And then maybe help us understand the customers and the geographies that are ramping in full volume right now, what we should expect over the next couple of quarters for that product line?

Yeah, Scott. What I would say is that geography is predominantly North America right now because a couple of carriers here are the most aggressive regarding enterprise FWA compared to international carriers. Most revenue was coming from North America, and I'd estimate that number is over 50% of what we saw in the previous quarter.

Great. Okay. Thanks so much, guys.

Thank you, Scott.

So I'm going to summarize now. 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.