INSG - NASDAQ

Hello and welcome to Inseego Corp.'s Second Quarter 2023 Financial Results Conference Call. Please note that today's event is being recorded. [Operator Instructions] On the call today are Ashish Sharma, CEO; and 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. Q2 was another solid quarter for us and I'm proud of what our teams have achieved. By all accounts, this was a very good quarter for across the board and gives us confidence that we are on the right path. Each of our businesses performed extremely well during the quarter and you can see our continued focus on operating efficiency showing up in the financial results. In particular, we continue to see growth in our 5G FWA business, with revenues up 50% sequentially over last quarter and 2.5x over Q2 2022. While we don't expect FWA to grow this quickly every quarter, it is clearly an indication that market adoption is accelerating. Overall, our 5G product portfolio which includes both FWA and hotspots, represented over 50% of our quarterly revenues for the first time with FWA representing roughly 33% of our overall revenues. This continued migration of our revenue mix resulted in another strong quarter from a margin perspective with gross margin of nearly 36% which when combined with the continued focus on operating efficiency and cost controls allow us to deliver our second consecutive quarter of positive operating cash flow. Based on our solid first half 2023 performance, we are very optimistic about the direction of business. As we look ahead to the second half of the year, we are laser-focused on execution and continuing the momentum from the first half of this year. By execution, I mean, delivering on our existing product portfolio, deployments of those products, releasing the next generation of our portfolio and maintaining strong financial discipline. As an example, in Q2, we released our latest indoor router FX3100 that covers the newly released mid-band previously used by the DoD. We have already launched it with UScellular and we will be launching it soon with another large carrier. Similarly, we continue to focus on growing our subscription and recurring revenue. We offer multiple cloud packages in different phases of the customer adoption cycle. And we are seeing very good progress in terms of the attach rate across the board. We expect growth will come over next several quarters as FWA customer base expands and universe of Inseego deployments continues to grow. These cloud applications are layered on the top of our 5G FWA product sale and represent step-by-step growth that we are focused on achieving. Now, let me discuss our quarterly performance. As I mentioned earlier, in Q2, we delivered the second consecutive quarter of positive operating cash flow which is very positive and something the company has accomplished in a long time. While our cash flow will fluctuate quarter-to-quarter, I'm extremely focused on getting to a point when Inseego is cash flow positive on a consistent basis. In Q2, we generated revenue of $53.6 million and adjusted EBITDA of $4.5 million. We are very proud of our first half 2023 EBITDA result of over $8.5 million. Our gross margin of 35.7% was consistent with our first quarter results and driven by significant growth in FWA revenue. We expect our gross margins to fluctuate in the mid- to low 30s range based on changes in product mix in any given quarter. But clearly, we are on the right path. Last quarter, we referenced a few onetime items that improved our gross margin. We did not have much of any onetime items in Q2, so it was a much cleaner result from a margin perspective. And as I've mentioned on previous calls, we continue to focus on our controllable expenses and running Inseego as efficiently as possible which resulted in cash OpEx of close to $17 million for Q2, reflecting our commitment to getting to a point where we are cash flow positive on a sustainable basis. As it relates to demand, we are seeing a different trend that is shared by the current macroeconomic environment and is impacting the entire industry. First, the demand for both our 5G hotspots and FWA products is solid and growing but inconsistent in any given period. We have seen sudden increases in demand at times which often lead customers and partners to absorb these shipments prior to placing new orders. Second, our customers and partners are keeping much less inventory compared to pre-pandemic periods which means we and our supply chain need to react very quickly to these demand variations. Finally, this industry trend is making us leave some demand on the table in any given period as we try to build and ship products well within the lead times, even if those lead times are much shorter than the lead times we have seen over the last couple of years. This has resulted in a dynamic where we have developed backlog from quarter-to-quarter, something I had not seen at Inseego prior to last quarter and it has now happened 2 quarters in a row. Despite the variability in demand cycle, we are seeing enterprise customers accelerate their investments in 5G as they gain a greater understanding of what 5G can do for their business. Now, let me share a bit more detail about our FWA deployment progress. We are seeing deployments across both small and large companies. An increasing number of large well-known companies have deployed 5G FWA across their nationwide footprints. Many more are assessing FWA as either a primary or backup connection with small-scale trials that we hope lead to large-scale network-wide deployments. This is a market that is in the early stages of adoption but based on what we are seeing, is one with huge potential. As we look towards the second half of 2023, I'd like to share a few observations. First, we are expecting to see modest revenue growth in the second half of 2023, driven by our FWA business. This is primarily a function of the shift in mix from 4G to 5G products. 5G will continue to grow in the second half of the year but largely offset by a decline in our 4G business. Second, we have a significant line of customers for FWA deployments. In many cases, customers are waiting for better mid-band coverage before out at scale but we have many trials underway. Third, our financial performance is much improved and reflects the strength of our strategy and the benefits from the investments we have made over the last several years. Our focus on operational discipline and excellence that we've implemented starting late last year is bearing fruit, driving improved margins and cash flow and an increasing number of customer wins. Our cost structure has been rightsized and will continue to focus on running the business efficiently. This focus has allowed us to generate positive cash flow in the past two quarters. We expect some volatility in cash flows quarter-to-quarter but this will likely largely be working capital and managing the supply chain and inventory needs of our customers based on the demand as I described above. Having said that, we expect to be cash flow positive for the full year even with potential quarter-to-quarter volatility which is a huge milestone for the company and one that we've been working hard to achieve. I'll now turn it over to Bob.

Thank you, Ashish. First, I want to extend my thanks to the entire worldwide Inseego team for delivering another very solid quarter, delivering positive profitability and cash flow. Well done. Let me review the results of our second quarter fiscal 2023. Please note that all metrics and comparisons made are on a non-GAAP basis. Please refer to our earnings release for additional details on the GAAP to non-GAAP reconciliation. Q2 revenue was $53.6 million, up 5.4% from the prior quarter. Our FWA and cloud software business comprised 65% of our total revenue and grew 42% over the prior year period. Next-generation solutions which are comprised of 5G devices and all our cloud software offerings represented 81% of the total revenue in this quarter. Software revenue accounted for 29% of total revenue. Second quarter IoT & Mobile Solutions revenue was $46.4 million, up 6.5% from the last quarter. The growth was driven by an uptake of our FWA solutions. Enterprise SaaS solutions revenue was $7.2 million, down 1% sequentially and up 4.5% over the prior year quarter. Consolidated gross margin was 35.7%, down 40 basis points from 36.1% in Q1 and up 602 basis points from 29.5% in, gross margin for the IoT & Mobile business was 32.9%, down slightly from 33.4% in the prior quarter and up from 27% in the prior year period. As Ashish alluded to in his comments, the meaningful improvement in gross margin on a year-over-year basis was attributable to a significantly higher mix of FWA revenue. Gross margin for the Enterprise SaaS segment was 54.1%, up from 52.7% in Q1 and up from 49.4% in Q2 of 2022. Q2 non-GAAP net loss was $2 million or a negative $0.02 per share compared with a loss of $0.03 per share in the prior quarter and a loss of $0.04 per share in the year ago quarter. We reported an adjusted EBITDA gain of $4.5 million which was up from a gain of $4.1 million in Q1 and higher than the $1 million EBITDA loss in the year ago period. For additional details on our non-GAAP and adjusted EBITDA results, please refer to our reconciliation tables in our press release. Cash, cash equivalents and restricted cash at the end of Q1 was $15.2 million. This cash balance was up from our cash balance of $8.7 million in the prior quarter. With that, let me turn it back to Ashish for his closing comments.

Thanks, Bob. To summarize, our ability to transform Inseego into an FWA solution company was demonstrated by first half results. There remains a huge growth opportunity across many of these enterprise customer segments enabled by our portfolio of 5G hardware and software. As 5G mid-band coverage continues to scale, the breadth of our portfolio gives me confidence in our ability to capture the many opportunities ahead.

[Operator Instructions] The first question is from Scott Searle of ROTH Capital Partners.

Nice job on the quarter. Ashish, maybe to quickly follow up. I want to make sure I heard some numbers correctly. I thought you said that the 5G FWA solution was 33% of the mix. I wanted to confirm that. Also, I'm not sure if I heard a mix number between 4G and 5G. I'd love to get the update on that front. And is there a comparable software number? I think you said it was 29% of the mix in the current quarter. Is there a comparable number that you had for the first quarter or the year ago period? And then I had a couple of follow-ups.

Thanks, Scott. I hope you're doing well. Yes, let me give you those numbers. I'll start with the last one, trust. So the software revenue was in the 28%, 29% range of the overall revenue. The -- and I would say about 5G was over 50%, so close to like 52% and 4G overall was close to 19%, 20% of the overall revenue.

Great. Very helpful. And then, Bob, maybe for you on the OpEx front, you guys have tightened things up a little bit. R&D was up this quarter. Wondering if there's anything to read into that and how we should be thinking about OpEx going forward if there's some further tightening or these are the levels we should be thinking about?

Yes. Let me start, thanks, Scott. Good questions. Let me start with your second question. I would view OpEx as flat to slightly down as we go forward; so thinking that way. And regarding your R&D question, actually, cash R&D was flat and will remain flat to slightly down. I think what you saw on a book basis is just limited to kind of how we amortize software with the mix of our various products. So that drove the book look.

Great. And then maybe, Ashish, just from a high level, looking at the opportunity in the pipeline for 5G FWA, I'm wondering if you could give us some metrics to kind of put around it, it's taken some time in terms of building out the mid-band coverage. It feels like we're a lot closer and you're starting to build up those pilots in that opportunity. I was wondering if there's some either soft metrics or harder metrics you could give us in terms of the pipeline, how big it is, the number of customers, maybe potentially the number of addressable devices that are under discussion. And going forward, what is the sales cycle looking like? Is that starting to compress? And when do you really think that we start to see the inflection? Does it happen later this year? Or we wait until 2024?

Yes, Scott. So what I would say is right, the market buildup would be gradual, right, as I mentioned before. And the main reason really is that there are a number of different factors that every enterprise or SMB customer looks at. The offering itself is really good, like the pipeline of interest from customers. We have thousands of customers, SMB and enterprise customers who have filed the product, file the 5G network and they love it but they all have different operational workflows, right, that they're trying to put on 5G and kind of segregate that away from the other broadband connections they have, right? So the decision-making, the decision process is very different from what we saw from our hotspot business in the past. And so it's a gradual step-by-step build. Lots of interest. Pipeline continues to be super healthy from big Fortune 100, 500 companies, to lots and lots of SMBs. And I would say like the deployment cycle, really depends on your use case, right? I mean where you have a use case of a remote worker. I mean that sale cycle is quite small. I mean that could take just a matter of a few weeks for the customer to try the product and then start handing it out to their workforce to the more workforce to bigger use cases where our outdoor product is going on connecting like thousands of locations, distributed locations, store locations for the customer and then kind of integrating the 5G band as part of their broader network that's in place, the existing LAN and the existing WAN infrastructure. So those deployments would take a little bit of time, like they take, give you an example, like you have a large customer who trialed the product maybe 12 to 18 months ago and they tried for a few months, they love the product. And it's taken them like 8 to 10 months now to roll it out to multiple thousand locations for the product. So in that case, it took time. But overall, the size of the business with each one of these enterprises is really good.

Great. And maybe last one, if I could. Just in terms of the channel for 5G, fixed loss access, you've got relationships with multiple carriers. I'm wondering if there's anything that's particularly productive either from a carrier standpoint or other channel VAR or otherwise that you're seeing a lot of productivity.

Yes. I mean we have built a route to market. As you mentioned, Scott, we have the traditional [indiscernible] channel. We have multiple programs with different carriers. And I would say the initial push, we're getting a lot of assistance from the carriers. I mean they're obviously super motivated to sell a lot of 5G band to enterprises and they love our solutions. And that's where I would say that we're seeing the biggest success either through the stock program we have with them or through multiple other co-sell programs we have with the carriers.

The next question is from Lance Vitanza of Cowen & Company.

Congratulations on the quarter. A couple of questions here. First, so tell me if this makes sense. So you've got a fixed wireless access and cloud business. It looks like it's at about $145 million revenue run rate and it's growing at 40% year-on-year. So I was just wondering, is it possible to talk about, I guess, 3 things? One, how long do you see, how long do you think you can maintain that type of growth? Or what does the growth plan look like over the next couple of years? Two, what is the fixed cost base necessary to support that growing revenue stream? And then -- and finally, what are the incremental margins? I mean, should we think about it? Is it a 35% sort of flow through once you've covered your fixed costs? Or is it considerably higher or is it lower than that, et cetera? I mean I think those questions would really help us triangulate on how to value this growing business.

Lance, good question. So let me try to break that down, right? So maybe I'll talk about first in the short term, right? I would say in the short term, the way you look at things is it's step-by-step incremental improvements, right? I mean I would not say that we could see this type of FWA growth every quarter. I mean it would be -- early in developing a new market, you see these up and down jumps. So we'll see that. But in the next longer term, right, 4 to 6 quarters, whatever you have it, that should settle down. And I would say the market opportunity itself is huge. So we're just only seeing a sliver of the market right now. And hence, the variability in the business and the order flow. Software business is a lot more stable. It grows at a slower pace but the way we have tied it up now with our 5G business is when FWA grows, so will our software business will grow. So I would say that in the long term, definitely, you're looking at very high growth rates year-over-year double digits, higher growth rates. How? Within the shorter lifespan of every quarter-to-quarter, how that movie plays out, that just -- it's going to be step by step, if that makes sense. And then, your last question about margins. I mean I would just say, look, we're just getting started. I mean we've got more growth on FWA coming. We've got multiple packages that's in very early in the adoption cycle. So as those things kick in, I mean, I definitely see that the overall gross margin target of over 40% is definitely very achievable.

Okay. That's actually really helpful. Next bunch of questions on free cash flow, where you did a nice job there. You generated some free cash flow. We were expecting it to burn cash on a comparable kind of EBITDA number, so that was good. I'm just trying to understand the variance. It looks like your CapEx was pretty close to what we had expected. So that doesn't explain it. But can you -- is it possible for Bob, maybe could you walk us just from EBITDA to free cash flow, $4.5 million of EBITDA, $3 million I'm calculating of sort of levered free cash flow? I'm guessing you had an inflow from working capital, working capital generated some cash. Is that accurate?

Our working capital did moderate in a positive direction from a cash standpoint. I'm just digging out a couple of other things. The other things we had working for us is basically we, I should say -- and again, against our expectation. We also, again, skimming down CapEx. We think we're in a good spot, we had a positive effect from working capital, as you mentioned. And then lastly -- and you probably saw this from the balance sheet. We also worked on inventory levels. as we've been kind of aiming to do over the last 2 or 3 quarters. We're not -- just from a forward expectation standpoint, we're not saying we could do that indefinitely but we did skinny it down quite a bit versus prior year. That's the big movement.

Okay. And then I did see something below the sort of the cash flow line. It looks like you raised $5.5 million in the quarter from a public offering. And I'm wondering if you could provide more detail on that transaction or if I'm misreading that.

Yes. No, no. Good Lance. Yes, the other thing that was a contributor kind of a nonoperational potent, more of a financing is we still had open capacity in the ATM facility that was in place for the last couple of years. And then working with our Board, one of the things we wanted to achieve was just maximum liquidity and flexibility. So we did execute against that and that's where we raised is about $5.4 million.

Next question is from Tore Svanberg of Stifel.

This is Jeremy on for Tore. I guess, yes, just let me offer my congratulations on the sell the free cash flow performance. as well. And just a quick follow-up on that last question. In the ATM, is there -- is that complete now? Are there plans to continue raising capital? Or is this the $50 million sufficient in the near to medium term?

We -- right now, I think the best way to handle it is we don't have -- we're not active in the market right now. So that's first. And we'll reserve to see if we have any new financing. But we have correctly sized the company factors. We've taken some additional cost reduction actions that are not yet in the financials but they will accrue positively to the latter part of this year. So we think we're very, very well positioned from a cost stack standpoint.

And just on those cost reductions in the latter part of the year, is that -- is there a way to quantify that for us? How should we think about that? I know you didn't state for the next quarter, we should think about being down a little bit sequentially but how about in Q4?

Jeremy, so what I would say is the $17 million cash OpEx we have right now is Bob mentioned earlier, I think you can take that slightly moderate that down later in the year. And that right there is about over a $40 million cost that we've taken out of the company going back to last four quarters or so?

Got it. And then maybe switching to the backlog commentary, Ashish that you provided, you said it was up sequentially in the second quarter in a row. Can you help quantify that for us? And then when you talk about having some of the orders that you're leaving some on the table? Are these basically getting pushed out in the future quarters and being added to backlog? Just help us understand kind of your visibility.

Yes. Good question, Jamie. Yes, I mean, those orders that we can't fulfill get pushed out to the next quarter. For this quarter, like, look, we just finished the first month of the quarter we're in a really good shape in terms of our target revenue for this quarter and it's all on supply chain now, right? So we're driving our CMs really hard to fulfill that -- those orders that you got. So on the revenue demand for this quarter, we already have orders for you.

Got it. And sort miss, did you provide expectations for this quarter? You said you had a bulk of demand already in place.

Yes. I mean, look, we're not providing exactly like the dollar number for the orders we have. I would just say like it's coming from what different customers. And we're just -- we have unloaded everything we have in inventory for those specific products and we're now quickly trying to refer that inventory so we can ship the products to the customers.

Got it. And then last question before I jump back in the queue. But on the inventory side, it sounds like it's lower than you'd like and you're trying to refill that inventory. Can you give us what kind of targets you might have internally? And if you have any commentary in terms of channel inventory, whether at your -- the VARs or supply or carriers?

Yes. I mean, look, not a lot of inventory at the channel and the carriers right now. And I'm not anticipating building up a lot more inventory. I think we're going to just run pretty moderate to what we have right now. And again, the whole reason we don't want to talk on up a lot of inventories just the demand cycles, the variability of the demand cycles within the quarters are still with the macro, they're still up and down. And so we just -- we're trying to be very cautious on trying to maximize the demand that we have with our customers and yet not load up the inventory as we had last year.

This concludes our question-and-answer session. I would 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 by our continued promise. Thank you again.