Inseego Corp. Q1 FY2024 Earnings Call

Hello and welcome to Inseego Corp.'s First Quarter 2024 Financial Results Conference Call. On the call today are Phil Brace, Executive Chairman of Inseego's Board of Directors, and Steven Gatoff, the company's Chief Financial Officer. During this call, we will discuss certain non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measures can be found in the earnings release on the Investor's section of the company's website. An audio replay of this call will also be archived there. Please note that today's discussion will include forward-looking statements. These statements are based on the company's current expectations and beliefs rather than historical facts. For information on factors that could cause actual results to differ materially from these expectations, please refer to the risk factors detailed in the company's Form 10-K, 10-Q, and other SEC filings available on the company's website. You may also reference the cautionary note regarding forward-looking statements in today's press release. With that, I'd like to turn the call over to Phil Brace, Executive Chairman of Inseego. Please go ahead.

Thank you, operator, and good afternoon, everyone. It's a pleasure to be here. I'd like to cover three topics with you today. First, I'd like to give you a quick summary of the Q1 results. Second, I'd like to share some thoughts on our capital structure. And third, I'll provide some high-level view of the current quarter and focus areas ahead. I'll then turn the call over to Steven, and we'll wrap up with some Q&A. Q1 2024 was a solid quarter for Inseego. Revenue came in at $45 million, above our guidance and helped by strong year-over-year growth in our FWA business. Q1 adjusted EBITDA came in at $3.8 million, which was also better than expected and was driven by higher gross margin and lower operating expense. During the quarter, the sales organization launched a new channel program, which is an important part of starting to diversify the company's revenue base and expand our go-to-market capabilities. We are already starting to see opportunities develop there. Finally, the company also secured a significant renewal of its subscribed management platform with a major Tier 1 carrier customer. As I mentioned on the last call, addressing our capital structure is a significant focus for the company and the Board. While we still have much work to do, the company's improved financial condition and business results give us confidence that there is a solution. Of particular note, we ended the quarter with more than $12 million in cash, which, along with the $15 million prepayment on the subscribed management platform renewal, allowed us to repay our expensive ABL in April. As noted in the press release, the termination of the ABL decreases our interest expense meaningfully. Importantly, it also now provides us with the capacity to entertain other capital structures, like secured debt, that will give us flexibility in terms of our ultimate capital structure and how we seek to restructure the existing convertible notes. The majority of the convertible notes are closely held, and we are working on developing an acceptable solution. The Board is taking a deliberate, methodical approach, and we are engaged with our legal and financial advisors. We will keep investors updated over the coming quarters as we continue to make progress. With that, I'd like to turn briefly to our CEO search progress. The interest has been robust, and we have identified a number of qualified candidates. Having said that, we are being thoughtful about moving forward, particularly as we navigate the important capital structure considerations I just talked about. Looking at the business, the outlook for the quarter is for continued growth in revenue and profit. We are seeing good demand for our FWA business, and we are starting to see a rebound in the mobile business. We are looking ahead to the back half of the year and beyond as we're also building a number of exciting new product and software opportunities in both the carrier and the MSO space based on the strength of our roadmap. With that, I'd like to thank the team at Inseego who work every day to make these things happen. I'm glad to take any questions in a few minutes. Right now, I'd like to pass the call over to Steven.

Thanks, Phil. Good afternoon, everyone. I look forward to covering three things with you today. First, I'll take you through the Q1 2024 financial results. Second, I'd like to address some new language that the accounting rules require we have in our 10-Q that's getting filed tonight. And third, I'll provide some color on the business and our guidance for Q2. As Phil noted, we'll of course wrap up by opening the call to your questions. With that, let's start with our Q1 results. Total revenue came in above guidance and $2.2 million or more than 5% higher sequentially at $45 million. Overall, performance in the FWA product both sequentially and year-over-year and growth in our telematics and subscriber management platform offerings all contributed to better than anticipated revenue performance on a general uptick in demand and sales execution in the quarter. As we've talked about previously, while we expected Q1 mobile hotspot revenue to be down on the transition of the 4G product end of life in the previous quarter, the mobile hotspot business came in ahead of expectations in Q1 on carrier uptake of our 5G products. FWA also saw good carrier demand in Q1 that drove year-over-year revenue growth of nearly 20%. The higher growth, higher margin FWA product now constitutes about one-third of the company's revenue, up from 23% in the same quarter of 2023. Looking at services and other revenue, as I mentioned, the telematics business came in ahead of expectations and at its highest quarterly revenue ever on good continued demand in the business. In addition to the telematics contribution to growth, Q1 revenue from our subscribed SaaS offering also came in ahead of expectations and was up sequentially over Q4. As Phil mentioned, we were pleased that one of our key carrier partners signed a new deal with us during the quarter. It began on April 1 and provides Inseego with increased revenue and profitability for the next two years as we manage the investment and growth in our FWA and mobility businesses. Moving on to gross margin. Q1 gross margin percentage came in at 38.7% on a non-GAAP basis. This was among the highest levels in seven quarters and like the prior quarter in Q4, was impacted by some one-time items. Product gross margin benefited from one-time pickups from components rebates, while services and other margin was lower on a higher proportion of professional services revenue in the subscribed business in Q1 that we don't expect to continue going forward. Looking at non-GAAP operating expenses, Q1 came in favorable to Q4 and in line with expectations. Sequential efficiencies in R&D and reductions in depreciation and amortization expense were partially offset by executive severance costs and G&A in the first quarter. We continue to take a disciplined approach to managing our spend across the organization, favoring pipeline and revenue-generating sales and marketing spend and differentiation-oriented R&D spend. Also of note and so far as overall expenses in Q1, for the first time in several years, the company's P&L contains accrued expense for incentive bonus plans for the company's employees. Previously, no such incentive was accrued or paid. With Inseego's improving operating performance, growing profitability, and increasing free cash flow, we're pleased to be able to return to more market-based compensation arrangements for the terrific group of employees that are driving the turnaround here in the business. Putting this all together, the favorable revenue performance and more focused operating expense resulted in Q1 adjusted EBITDA coming in higher than anticipated at $3.8 million, a margin of nearly 9% and the fifth consecutive quarter of positive adjusted EBITDA. Wrapping up our Q1 results with a balance sheet, cash improved meaningfully from year-end, coming in at $12.3 million at March 31. And while we had $4.7 million drawn on our credit facility at the end of Q1, as Phil mentioned, we voluntarily paid that off and terminated the ABL facility in April. Additionally, the combination of the $15 million upfront payment on the subscribed renewal in April 2024 and our improving financial profile has provided the company with liquidity on hand to finance our working capital needs going forward. With that, I'd like to move to my second topic today and call out some new language that's going to be in our 10-Q that's getting filed tonight that relates to the accounting rules around our outstanding convertible notes. As you heard Phil say, we're being methodical and thoughtful about how we move forward to achieve an outcome that's optimized for our stockholders and relevant stakeholders in restructuring and refinancing the convertible notes. With the maturity of the notes now technically being one year out in May 2025, the accounting rules dictate that we include wording in our 10-Q that's typically referred to as going concern language because while we are engaged with our bondholders to restructure and refinance the notes, we cannot be 100% assured that the desired restructuring and refinancing will be accomplished. It shouldn't go without noting that Inseego is in a positive and fairly uncommon position and including this required accounting disclosure. We're profitable on an adjusted EBITDA basis. We're free cash flow positive. We don't need any financing for operations. And we're continuing to improve our near-term liquidity. With that, let's turn to the third discussion topic on what we see in the current quarter. On product revenue, there are two drivers of higher revenue in Q2 over Q1. First, we're seeing strong carrier demand for our mobile products on a combination of increased structural demand as well as some more perishable in-quarter promotions at one of our carrier customers. Second, we're continuing to see growth at FWA in Q2 on early traction from the Q1 re-launch and rebranding of the Inseego channel program, Inseego Ignite. Services and other revenue is also seeing sequential revenue growth in Q2, driven by the increased revenue from the subscribed renewal that's adding a combination of SaaS subscription expansion and additional professional services revenue. Pulling this together, Q2 non-GAAP gross margin percentage is expected to be down slightly on product mix as the high-margin subscribed revenue is offset by an even greater increase in the lower gross-margin mobile revenue. Q2 non-GAAP operating expenses are expected to be relatively flat on a dollar basis over Q1. And so considering all this, we're providing the following guidance for Q2 2024. Total revenue in a range of $52 million to $56 million and adjusted EBITDA in the range of $6.5 million to $7.5 million. In closing, we're pleased with the results that we delivered in Q1, and we're encouraged by the several positive dynamics going on in the business that are driving greater revenue and profitability in Q2. With that, we appreciate your time and support, and we're glad to open the call for questions. Operator?

Our first question comes from Tore Svanberg with Stifel.

Congratulations on the continuous progress here. So my first question is on the Q2 guidance. So just from a mix perspective, just so I understand this. So product revenue obviously up, but carrier up more than fixed wireless. And then, what were some of the moving parts on the services again, please?

Sure, Tore. It's Steven. So what we talked about was that the subscribed renewal is coming in, and we're successful in negotiating a higher revenue for that. And so in services and other, the subscribed business that's driving the bigger increase in revenue on that piece. And as you said, in product revenue, we talked about the increased revenue coming from both mobile and FWA.

Great. And as my follow-up, this sort of new language that's coming in the 10-Q. So is this sort of a recent accounting rule change or was this kind of more you were notified about this is just typical language that you have to include?

Yes, we were not informed about either of those. It's mainly based on self-reporting and is mentioned in the footnotes of the financial statements. This is the standard accounting requirement regarding what is classified as a going concern. They assess that since you're one year away from the maturity of the $163 million notes in the capital structure, those are now deemed current. Thus, if you examine the cash balance, it isn't actually $160 million. This situation triggers the need to disclose the going concern language due to the capital structure.

Sounds good. Actually, just one last one. You mentioned telematics revenue reaching a record this quarter. Is that business expected to be up as well in the June quarter or will take a breather?

Probably more of the latter. We were pleased that in the first quarter, it did nicely coming off of 2023. But our expectations are that it kind of continues at a consistent approach.

The next question is from Lance Vitanza with TD Cowen.

And first off, congratulations. Great quarter. I guess, let me just start with the first quarter. And we'll get to the guidance in a second. But revenue was up 5% sequentially. I assume that's the right way to analyze revenue growth at this stage. And so I'm just wondering if there's anything unusual there from a timing perspective, either I'm guessing not pulled forward given the guidance, but perhaps that got pushed out of the fourth quarter of last year and into the first quarter?

On which piece specifically? You mean in general?

On revenue, yes.

Yes. The short answer is no. There was nothing meaningful that, to both your points and question, nothing meaningful that got pushed from Q4 into Q1 and nothing that got pulled from Q2 into Q1. It was a pretty in-quarter demand generation and execution quarter.

Okay. Great. Regarding the second quarter guidance, which shows 20% sequential growth at the midpoint, I'm curious how much of this is due to the prepayment received in April. I assume the $15 million is a prepayment, so how much of that will be recognized in the second quarter? Additionally, could you provide an estimate for how quickly the remaining prepayment will be recognized as revenue throughout the rest of the year?

Sure. The easy answer, both conceptually business-wise and financially, is the prepayment does not affect revenue recognition at all, zero. So it just affects cash. We had more cash on hand, which was helpful. That contract is basically taken straight line ratably over the two-year period. So the fact that we had a prepayment upfront has a zero impact on the P&L. On revenue recognition, it's recognized ratably over the period.

Okay. Great. So my question is, how much confidence do you have in the visibility of revenues at this point, and what has changed? It wasn't that long ago that the leadership of this company was quite certain that they had virtually no visibility.

Yes, it's a reasonable question. Phil and I will share the response. Regarding our guidance for Q2, we remain optimistic about our business, particularly in the product area. There is significant activity occurring in the latter part of this quarter, which leads us to believe there is demand that could be time-sensitive, indicating current promotions. The key issue will be determining how this rise in demand, along with the progress of our channel program, translates into sustainable growth for Q3 and Q4 as we adapt and expand our team. We're cautious about projecting too far ahead, yet we're feeling positive about our current situation. Our visibility is bolstered by a combination of increasing demand and long-term outlook. Additionally, our approach to the business has shifted as Steve Harmon and the sales team monitor operations differently. Everything is now tracked in Salesforce, and we conduct pipeline review calls to assess what Q3 and Q4 might look like. This new method represents a significant change compared to last year and is a key factor in our outlook. Moreover, there seems to be a slight increase in market demand.

Yes, no problem. Generally speaking, we are experiencing strong demand across our FWA products. We have some promotional activities we are looking to leverage, which aligns well with the quarter. Additionally, the subscription renewals contribute positively. Overall, we have some favorable conditions driven by the strength of our product roadmap. Customer acceptance has been strong, and we will move forward from here.

If I could just squeeze one more in before I jump back in queue. The fact that this carrier was incentivized to give you a $15 million prepayment suggests to me that the pricing trends that you guys are seeing are most likely in your favor and that the carrier was trying to get ahead of perhaps escalating prices over time. Is that a reasonable read? Or were there some other factors that we're not privy to behind the scenes that might have driven that prepayment?

I think you'll see the impact of that renewal in our financials, allowing you to make assumptions about it. We have closely collaborated with this customer for many years, and this product has been part of their operations for a long time. It was one part of a complex negotiation, and we successfully negotiated it. So, I wouldn't read too much more into it than that.

Next, we have a follow-up question from Tore Svanberg.

Phil, I had a question on the channel program. This is obviously something that's going to diversify the revenue base. Could you talk about what some of the areas that you are targeting from that program? And also from an OpEx perspective, what does that program necessarily mean? Obviously, I assume that's already included in your Q2 guidance. But even beyond that, would you have to invest more OpEx dollars to get that program up and running?

Yes, let me do my best to answer that and then Steven can chime in if needed. Historically, the company's revenue has largely come from very large carrier customers, and we are grateful for their support as they play a significant role in our business. However, we also recognize the need to diversify our revenue base to reduce our dependence on these large customers. These customers typically focus on specialized, higher-value solutions in which we play a role. Some of the new sales team members we are bringing on have experience in developing programs around this, which will be integral to our strategy for diversifying revenue going forward. In terms of additional costs, our goal is to reallocate existing capital to fund this initiative, so I do not anticipate any significant changes in our cost profile as a result. We are being strategic about our spending.

Next, we have a follow-up from Lance Vitanza.

I wanted to ask about the cash balance at the end of the first quarter. Before the prepayment, you reported a cash amount of $12 million, which, although not a large sum, exceeded our estimates. I was hoping you could clarify why the cash surplus at the end of the quarter was significantly greater than the EBITDA increase. We're pleased to see both indicators. It seems like there were some favorable working capital inflows during the first quarter. Is that correct? If so, should we expect those to reverse later in the year? I’m considering how we should project your cash flows moving forward.

Yes. And that's right. I think essentially, recall the conversation we had from Q4 where the cash flow at year-end and the cash balance was a little bit lighter. And so there's a view that that was a timing difference between Q4 and Q1. If you look at the two together, it's pretty consistent quarter-to-quarter. And so, one, we expect a bit of an uptick in Q2, as you would suspect, with the core business growing and the EBITDA profitability growing. And then, we'll see what happens in the back half of the year. But we expect it to be consistent.

This concludes our question-and-answer session. And it concludes our conference. Thank you for attending today's presentation. You may now disconnect.