Inseego Corp. Q2 FY2024 Earnings Call

Hello, and welcome to Inseego Corp.’s Second Quarter 2024 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 questions and answers. 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, certain 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 Investor’s 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 the company’s Form 10-K, 10-Q, and other SEC filings, which are available on the company’s website. Please also refer to the cautionary note regarding Forward-Looking Statements section contained 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. Good afternoon, everyone. It’s a pleasure to be with you today. I’d like to cover three topics with you today. First, I’d like to provide a high-level view of the Q2 results; second, I’d like to share my perspective on the accomplishments that we made in improving our capital structure; and third, I’ll comment on the current quarter and focus areas. I’ll then turn the call over to Steven, and we’ll wrap up with some Q&A. Q2 2024 was a very strong quarter for Inseego. Revenue came in at $59 million, above our guidance and helped by strong year-over-year growth in our mobile business and the effects of the previously discussed renewal of our subscribed management platform at a major customer. Q1 adjusted EBITDA came in at $8.3 million, which was also better than expected and was driven by a strong gross margin percentage and solid OpEx control. During the quarter, the company continued to add leadership capability to the teams in both new sales and operations executives, and you’re already seeing the impact of these additions. During the quarter, we made significant progress on addressing our capital structure. Improved financial performance enabled a series of transactions that resulted in restructuring the majority of our outstanding convert for a mixture of cash, new favorable long-term debt, common equity, and warrants. This is a very positive outcome for the company, and we received strong support from our largest bondholders and our largest stockholders. As Steven will talk about in his prepared remarks, the pro forma impact of these transactions resulted in significantly less debt and a very manageable leverage profile. While we still have some work to do, I’m very pleased with the progress today. I’d like to mention briefly our CEO search. As you saw earlier in the week in our filing, I was pleased to extend my term as Executive Chairman of the Board in order to provide some time to finish the restructure work, as well as continue supporting the good momentum in the business. The Board and I are taking a deliberate and methodical approach to the search. The company is currently working well, and I have an excellent engagement with the executive team and the board to drive things forward. On this last front, the outlook for the quarter is for continued year-over-year growth in revenue, profit, and cash generation. On the product front, our next generation products are well in development, which I believe will continue to advance our capabilities and provide increased value to our customers. With the new capital structure, improved financial performance, a strong product roadmap, and large growing markets, the future for Inseego is bright. 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, but 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 details of our Q2 2024 financial results; second, I’d like to share some more information on the important transactions that we executed to restructure our convertible notes and improve our capital structure; and third, I’ll provide some color on the business and guidance for Q3. As Phil mentioned, we’ll, of course, wrap up by opening the call to your questions. With that, let’s start with our Q2 results. As Phil highlighted, total revenue came in well above guidance at $59.1 million. Our revenue grew sequentially over Q1 by more than $14 million or 31%, and for the first time in nearly three years, total revenue grew year-over-year, coming in at positive 10% over Q2 2023. The two primary growth drivers were: one, strong performance in the carrier mobile hotspot business on the product side, where Q2 revenue was up 37% year-over-year on our carrier partner, MiFi promotion, that we mentioned on the last call; and, two, growth in our subscribed SaaS offering from the contract renewal that went into effect April 1st and that we also mentioned on the last call. Looking at FWA product revenue, that came in at essentially the average of the past several quarters. A last-time 4G buy helped shore up the quarter as our newly implemented channel program takes some time to ramp up and our new team builds pipeline and drives their initiatives in the space. Rounding out services and other revenue, our telematics business came in at a consistent and record high level as it did in the previous quarter on good continued global demand and execution in the business. Moving on to gross margin, Q2 gross margin percentage came in at 39% on a non-GAAP basis, consistent with the prior quarter and among the highest levels in the past two years. Looking at non-GAAP operating expenses, while a slight uptick in sequential spend from Q1, sound expense management and efficiency efforts saw Q2 total OpEx spend come in lower than it was year-over-year, both in terms of aggregate dollars and as a percentage of revenue. OpEx was 32% of revenue in Q2 2024, down favorably from 39% in the prior quarter and down favorably from 37% year-over-year. We realized efficiencies on a percentage of revenue basis in all areas of OpEx in Q2, from sales and marketing to R&D to G&A. It’s notable that this strong expense outcome was achieved even after including an accrual this quarter for an annual cash incentive bonus for the terrific Inseego employee base. We shared a bit about this on the last call, and so far as it being new incremental spend this year, noting that cash bonus expense hasn’t been included or paid in the past several years. Now it will be, and it is self-funded. Putting this all together, the favorable revenue performance and focused operating expense management resulted in Q2 adjusted EBITDA dollars coming in at more than double the prior Q1 quarter at $8.4 million at a record high margin of 14%. It was also the sixth consecutive quarter of positive adjusted EBITDA. These improved operating results allowed us to deliver GAAP operating and net income for the first time in more than five years. Wrapping up our Q2 results with a balance sheet, cash improved meaningfully from Q1 coming in at $49 million at June 30th. Our cash on hand benefited from three positive dynamics. One, the ongoing higher profitability and net cash generation of the business in Q2. Two, the advantageous April 2024 $15 million upfront payment on the multi-year subscribed SaaS contract renewal that we mentioned. And three, there was a tiny benefit from the short-term loan that we took out to repurchase a large convertible bondholder at a discount that funded $16.5 million on that Friday, June 28th, the last business day of June. Accordingly, that funded loan cash shows up on our balance sheet at the June quarter-end. With the $32 million purchase of the bonds occurring on the next business day, on Monday, July 1st, that use of cash and the resulting reduction of debt was technically in Q3 and will be reflected in our Q3 2024 balance sheet. As we also discussed briefly on our last call as a subsequent event, in Q2 we voluntarily paid off and terminated the relatively restrictive and expensive ABL credit facility. This action had a number of benefits including freeing up capital and providing good operating flexibility that enabled us to enter into the various transactions to address our convertible bonds. The final point to make on the balance sheet is that with the convertible notes now being due within a year, you’ll see them presented in the short-term liability section of the balance sheet. The good news is clearly that we purchased or refinanced nearly 90% of the bonds and with the support from some of our largest and longest-standing stakeholders, we achieved a solid outcome. With that, let’s move on to my second topic and look at the convertible notes restructuring and capital structure improvements that we accomplished in the past few months. As you heard us say over the past several quarters, we’ve been methodical about driving a thoughtful and optimized outcome for our stockholders and relevant stakeholders in restructuring the convertible notes and reducing our overall debt levels. This has been a multi-step process with a lot of considerations. Over the past 75 days, we engaged with all of the top 10 holders of the convertible notes and we have either purchased or entered into binding agreements to exchange the remaining bonds for long-term debt and or equity that covers $142 million or 88% of the $162 million in face value of the bonds. Pro forma for these transactions, there is only $19.9 million of convertible notes remaining outstanding with new long-term debt of $36.6 million and a short-term loan of $19.5 million. That brings pro forma total debt to $76 million on LTM adjusted EBITDA of approximately $20 million. Our pro forma net debt is an even lower leverage ratio of less than 3 times. This is a meaningful reduction in debt and a far more appropriate leverage profile for the company. As a final note on the debt restructuring, we want to also call out an advantageous feature that we were successful in structuring. As part of these transactions, the warrants that were issued to bondholders who exchanged their convertible bonds for new long-term debt and equity are cash pay. That means that upon their exercise, the company will receive approximately $32 million in cash proceeds, a further enhancement of liquidity and financial flexibility. We’re pleased to have executed these transactions and accomplished a meaningful reduction of debt and right-sizing of our capital structure. Adding that positive dynamic to our profitable operations, free cash flow generation, and continuing growth, we see the company as now very well positioned and financially strong to support driving further stockholder value. So, with that, let’s turn to the third topic on what we’re seeing in the business in the current quarter and provide our guidance for Q3. Overall, we’re bullish on delivering revenue growth and expect to continue to show improvements in terms of year-over-year performance. On mobile broadband, we have good visibility and confidence in our ability to deliver robust year-over-year growth again in Q3 as we’re continuing to drive our mobile broadband products through our large carrier partner promotion. We’ll see the extent to which Q3 yields the same robust quarterly results that Q2 produced. On FWA, we continue to invest in building pipelines and the overall channel program and expect marginally lower FWA revenue in Q3 considering the FWA last-time 4G buy I mentioned that occurred in Q2. On services and other revenue, we expect to have another solid quarter in Q3 and come in at levels consistent with Q2 2024 on a dollar basis. As far as gross margin, Q3 2024 non-GAAP gross margin percentage is expected to be relatively consistent with Q2, noting that the final revenue mix in Q3 between mobile broadband, FWA, and services and other will be the ultimate determinant. Q3 non-GAAP operating expenses are expected to be relatively flat over Q2 in the $19 million range. And so considering all this, we’re providing the following guidance for Q3 2024: total revenue in a range of $54 million to $58 million and adjusted EBITDA in a range of $6.5 million to $7.5 million. In closing, we’re glad to see the strong growth and profitability delivered in Q2 and we’re encouraged by the positive dynamics in the business that are driving continued revenue growth and profitability as we move through 2024. With that, we appreciate your time and support and we’re glad to open the call for any questions.

Operator Instructions. And our first question will come from Lance Vitanza of TD Cowen. Please go ahead.

Thanks and congratulations on a strong quarter. On the revenue side, I was particularly impressed with the mobile hotspot sales growth. I’m wondering, do you have much visibility into end market demand and sell-through? Presumably the quarter saw a lot of restocking or stocking up, but is it possible to talk about underlying strength or weakness in final demand?

Yeah. Hey, Lance, this is Phil. I mean, we kind of teased this on a little bit of the call. We initiated a collective program with one of our big carrier partners, and frankly, the program has gone really well. You’ll see that our inventory has actually gone down through the quarter as well, representing us shipping a lot of products there in that space. Our demand looks to be strong for the quarter. Some of these things I would say are a little bit perishable, right? There’s a promotion going on, they’re executing well, and we’re delivering well. Right now, we are scrambling for parts as demand has increased significantly. So right now the visibility of our demand is good, and we’re just trying to take advantage of the opportunity while it exists.

Great, thank you. Now, regarding the gross margin, it's impressive to see the year-over-year performance. I find it significant to highlight the incremental gross margin achieved alongside revenue growth. Revenues increased by $5.6 million compared to last year, while gross profit rose by $3.9 million on a non-GAAP basis. This indicates around a 70% incremental margin, suggesting you've likely reduced a considerable amount of fixed costs. I can't recall seeing a 70% incremental margin at Inseego recently, so well done on that. However, can you provide more detailed insights on how sustainable these improvements might be in the upcoming periods?

Yeah. I’ll try this at a high level, and then, Steven, you can just help with some of the details. I mean, look, at a high level, year-over-year, I’d characterize it as three things. One, you’re seeing good OpEx control, okay? So, year-over-year, we did focus on our cost structure, and I think we’ve been disciplined about it. I think you’ve also seen mix improvement and core product gross margin improvement there as well. I would say those three big things drive that. Whether it’s sustainable? I mean, look, I think the OpEx control is going to be sustainable. We’re pretty focused on that as a company, and I think the gross margins going forward will be dominated by mix, I would say, the mixing between the products. So I don’t know if Steven…

Yeah. Yeah. Lance, a really good question, and Phil made good points. If you look at at least two of those big buckets on the cost side, which was a big driver looking back year-over-year: first, we immediately implemented a cost restructuring and we really hunkered down and looked at the business and took out a lot of costs just wholesale. You saw an uptick in margins pretty much right after that, beginning in Q4. So that's part of the structural cost structure that Phil mentioned, and that's pretty sustainable. Then two, higher margin 5G mobile products now replacing the lower-margin 4G arrangements from the previous year contributed to a sustainable uptick in margins.

Great. Regarding my last question, I noticed that you made several significant hires during the quarter and since the beginning of the year, which I believe is a positive move for positioning the company for future growth. I assume this is also a key priority for you. Should we anticipate any short-term impact on margins below the gross profit line, possibly due to an increase in SG&A as you bring on additional personnel, or is this not likely to be significant?

The punchline is that the folks we added and brought in were done very, very deliberately, surgically, and kind of a rifle shot, if you will. In many cases, there were some organizational changes, pruning, and it was a switch out, not gross adds. So it’s a good question. I’m glad you clarified it last. These are not a step-function increase in a cost structure. We look at adding folks and skills for the direction that we’re headed while maintaining control over total headcount and compensation. So, net-net, OpEx is expected to be pretty flat on a total dollar basis, Q2 to Q3.

Great. All right. Well, thanks for taking the questions.

Yeah. Sure. Thank you.

The next question comes from Scott Searle of ROTH Capital. Please go ahead.

Hey, good afternoon. Thanks for taking my question. Great job on the quarter, guys. It’s phenomenal what you’ve done in, I guess, over a three-quarter period. I apologize, I got on the call late, so I hope I’m not being redundant here. But looking at the services line, it’s a big step up sequentially. Steve, is there a one-time item in there or something of note, or is that a sustainable level? And then, as we’re looking out to the September guidance, I’m wondering if you could just give us directly some of your thought process on access and services. And then I have a couple follow-ups.

Hey, Scott, I got the first one on services and revenue. I apologize for the choppy connection. The punchline on services and others is we were really pleased to renew our Inseego subscribe, which is a billing and subscriber management platform with a large carrier customer. We were able to secure an uptick in the pricing of that. It went into effect this quarter on April 1st, so you saw a full quarter’s impact in Q2, and therefore, the step-up in revenue from Q1 to Q2. It’s a two-year fixed contract, so that is sustainable, and we’re really pleased with that relationship. So that adds a lot of color and good substance to services and others. On the mobile broadband side, we’re seeing really nice uptake in the product overall, even through one of our large carrier customer promotions that did well in Q2. We’re engaged with them again in Q3, and so we have high hopes and expectations and good visibility as we still have two more months left in the quarter.

Very helpful. And in terms of diversification, you still remain fairly concentrated with a couple of large mobile operators in North America. I’m wondering how you guys are progressing in terms of your diversification efforts.

Yeah. Scott, I’ll take that one. So, that does remain a priority for us. We love our biggest customers and spend a lot of time there and continue to work hard to earn their business every single day, but we recognize that we need to diversify ourselves a little bit. You’ve seen us make investments in building a value-added reseller channel. I think our goal is to expand our reach, especially in the small and medium business sector and local government via resellers. We know that some competitors exist and have a robust business in that space, and we are coming at it from a differentiated point of view, leveraging our experience and validated relationships with major carriers.

Yeah. And Phil, lastly, congratulations on extending your term. Along those lines, your priority over the next 12 months, do you start thinking about going on the offensive from an M&A standpoint?

Yeah. Good question. I mean, we still have some work to do on the restructure side. Okay, so priority number one for me is to finish up the last bits of that. We are taking a deliberate and thoughtful approach on the CEO search. In terms of priorities going forward, we’ll be looking at expanding our revenue diversity and portfolio footprint. When we get on solid footing and growth, I certainly think we’ll be considering both organic and inorganic opportunities. But right now, our priority is just to continue the restructure and start realizing the fruits of that labor. It’s a pleasure to even reach the point where we can think about those future opportunities, compared to where we were just a few quarters ago.

Hey. Again, congrats and thanks so much.

Thanks, Scott.

Thank you.

This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today’s presentation, and you may now disconnect.