Michael Sklansky - Head, Investor Relations Sue Swenson - Chair, Chief Executive Officer Michael Newman - Executive Vice President and Chief Financial Officer.

Good day everyone and welcome to the Inseego Fourth Quarter 2016 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note the event is being recorded. I would now like to turn the conference over to Mr. Michael Sklansky, Head of Investor Relations for Inseego. Please go ahead..

Thanks William. During this call, non-GAAP financial measures will be discussed. A reconciliation to the most directly comparable GAAP financial measures is including 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 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. Now, I would like to turn the call over to Sue Swenson, Chief Executive Officer of Inseego..

Thank you, Michael and good afternoon everyone and thank you for joining today’s call where we’ll share our Q4 results and provide an update on our key initiatives. We’re very pleased with the continued strong performance of our Ctrack business and Inseego North America IoT business formerly known as FW.

Ctrack subscriber and revenue growth once again displayed strong trends and we made further strides in transitioning Inseego’s North America’s business model to recurring revenues and SaaS solutions.

So before I provide more details about the business performance I would first like to provide an update on the proposed sale of the MiFi Mobile Broadband business to TCL. Inseego received stockholder and bondholder approval for the deal early this year.

However, before the parties can conclude the transaction approval is also needed from US Government’s committee on foreign investment in the United States better known as CFIUS. Which is a nine member committee made up of nine different federal agencies in the US Government and shared by the US Department of the Treasury.

In early February, CFIUS provided the parties with a summary of potential terms that might be included in a mitigation agreement. After the initial review period insighting [ph] the need for additional time to review our case, Inseego and TCL agreed to and received approval to withdraw and refile on February 3.

Yesterday CFIUS advised the parties that the 30-day review period have concluded and it is undertaking a continued review of the proposed transaction. This provides CFIUS an additional 45 days to review the proposed transaction.

Very important to note, that CFIUS is not obligated to take the entire period and may conclude its review anytime within the additional 45-day period.

We genuinely believe that this transaction is good for America, it will not only retain but possibly add jobs in San Diego and will enable the MiFi hardware business to be part of a much larger organization and portfolio of hardware products which will bring added financial stability to a business that frankly was not part of Inseego’s future strategy.

We see no reason why the sale of the MiFi business to TCL particularly with the mitigation terms we’ve been discussing would pose a security threat for the United States. Unfortunately our transaction is occurring in a window of administration transition which makes it challenging when you have the arrival of new agency leadership.

In fact, we believe that a failure to approve this transaction would have the exact opposite effect of what CFIUS is guarding against because TCL intends to not only retain, but grow the MiFi team in the US and not move any jobs or technology to China.

We cannot be certain that our transaction will ultimately be approved by CFIUS and are developing appropriate contingency plans, however based on the constructive interactions we’ve had over the past several months with TCL and CFIUS, we believe that we will be able to receive a mitigation agreement and close the TCL transaction.

Because of the ongoing sensitive nature of the CFIUS process, the format of today’s call will be different than usual, we will focus primarily on the results of the quarter just ended and first quarter 2017 guidance. However, we will not have a Q&A portion of today’s call.

When our process with CFIUS concludes, we will host a subsequent call to discuss our forward-looking business objectives and plans in more detail. So moving onto the business.

Our strategy for the last year and half is been to transition to a business that is focused on growing subscribers and generating return revenues and that is exactly what we’ve been doing at Ctrack, with SaaS solutions which include fleet management, usage based insurance and asset tracking and monitoring.

And at Inseego North America, we’ve been focused on growing our SaaS software and services solutions. In the fourth quarter of 2016, Ctrack added 21,000 subscribers which brings total Ctrack subscribers to approximately $432,000 representing quarter-over-quarter growth of 5% and year-on-year growth of 21%.

Ctrack SaaS software and services revenue growth is following suit, driving our overall company growth in these high margin recurring revenues by 18% year-on-year. This growth represents significant improvement to Ctrack’s growth compared to when we acquired the business in October, 2015.

Ctrack’s revenue growth is consistent with strong industry trends according to a report by research and markets, the global fleet management solutions market is projected to grow from $8 billion in 2015 to $35 billion in 2022. A CAGR of 24%.

Well, it’s taken 30 years for this industry to reach $8 billion growth is expected to expand over 400% in just the next seven years. Industry growth is being driven by new applications such as maintenance planning, job dispatch, route optimization, drivers safety, fleet security, fuel card integration and regulatory compliance.

And Ctrack growth is also being driven by two key differentiating factors. First, Ctrack has a physical presence in global regions experiencing rapid Telematics growth including Africa, Australia and certain regions of Europe.

Customers tell us that having feet on the street and aftermarket support differentiates Ctrack from many of our key competitors in these regions. And second, the breadth of Ctrack’s portfolio aligns well with targeted market opportunities.

A portfolio review of markets, products, regions and distribution strategies is enabling the leadership team to prioritize and leverage success globally with a focus on execution.

Our recent conversations with potential distribution partners and channels such as carriers, automotive OEMs and third-party distributors have reinforced how these two factors combine to make us quite unique.

We believe that many of these entities are looking to play broadly across Telematics not just in a particular segment such as SMB fleet, but the Telematics ecosystem is still very fragmented. With our competitors typically focusing on one specific segment of Telematics with in a particular geography.

In contrast, Inseego can offer customers and partners mature offerings with a global subscriber base and referenceable [ph] tier 1 customers across many of the highest growth verticals of Telematics. This includes enterprise fleet management, SMB fleet management, UBI car sharing and asset management and logistics.

During the quarter key customer runs [ph] within fleet management verticals, where we have particular strength included number one Mammoet, which is a global leader in heavy lifting and transport for the construction industry. Number two, Australia Post, one of Australia’s largest government owned organization.

At number three, Northumbrian Water, a utilities business in the United Kingdom providing water main and sewage services.

In addition, during the quarter we began deploying a sophisticated fleet management system which incorporates various sensors throughout the vehicle to monitor operational efficiency and protect cargo for one of the world’s largest internet merchants. Following on the heels of our successful deployment with KLM.

We continue to broaden the customer base of our airport logistics solutions, our airport logistic solution gives ground service equipment providers and owners, the ability to track the motorized and non-motorized equipment and their utilization in order to meet airport authority requirements and managing control their operations.

In addition to KLM, customers now include Hannover Airport and dnata, one of the world’s largest air services providers offering ground handling, cargo, travel and flight catering services across five continents. During the quarter we went live with our SMB platform in the US.

In addition to the US, we currently sell our SMB product in regions across the globe including Australia, the UK, the Netherlands, Germany and Ireland.

The greenfield opportunity in the US allows us to design and unveil a new platform created to be intuitive and user-friendly, cutting through the clutter and complexity of many of the competing platforms. Based on positive initial customer feedback, we believe we’ve hit the mark on platform design.

We intend to roll out the new platform across other global regions in which we currently sell our SMB product supported by a combination of marketing and sales efforts.

We continue to be encouraged by the improving SaaS software and services mix for the Inseego North America business driven by increased sales of business connectivity bundled solutions and SaaS products. When examples of our SaaS product is our Device Management Solutions or DMS.

This is a hosted SaaS platform that automates complex workflows for device asset management for enterprise, government and carrier organizations. DMS makes it easier for our carrier customers to win accounts by providing branded device management experience with tight integration into the carrier and enterprise ERP and billing systems.

We currently have rolled this platform out with a few carriers and large customers, but we believe it has broader global appeal and have recently added several non-carrier accounts including the City of San Diego.

I believe that it is clear to see that we have compelling SaaS services and solutions and strong market positioning in the high growth, low penetration verticals of IoT. We believe we have an achievable path to 20% plus revenue growth across our key markets.

To execute on these opportunities, it’s obviously very important that the organization has the right leadership to support our global orientation and business integration. So we’ve been making organizational changes necessary to thrive in a global SaaS environment.

Cobus Grove the previous General Manager of Ctrack relocated from South Africa to San Diego during January to support our global strategy of leveraging our capabilities across all of our regions.

With Cobus’s global experience in the Telematics space, he will oversee the regional growth strategies for Inseego and with the importance of marketing in the Telematics industry today, we were fortunate to bring Melissa Gardner to Inseego as Vice President of Global Marketing, to drive global market leadership and demand through integrated digital marketing campaigns.

Prior to joining Inseego, Melissa was Vice President of Marketing with Lanyon, a SaaS provider of software to the global meetings, events in the travel industry space. Melissa also brings years of global experience in technology and SaaS companies.

Before I turn the call over to Mike Newman our CFO, I would like to take a moment to sincerely thank the employees of Inseego around the globe for supporting the company’s goals and working to complete the transformation of the company, to one well positioned growth of subscribers and revenue in high growth markets with plenty of opportunity.

With that, I’ll now turn the call over to Mike..

Thanks Sue and thanks to everyone for joining us on this call. I’m extremely proud of our employees for their significant accomplishments in the fourth quarter. During what’s been a very busy time at Inseego.

While working diligently on the MiFi divesture transaction and our transformation into Inseego from Novotel Wireless our team’s continue to lay the groundwork for our future as a pure play IoT company driving strong results in our core SaaS software and services businesses.

Our SaaS software and services revenues increased by 18.3% in the fourth quarter of 2016 compared to 2015. These are most profitable revenues and represented a record 28.2% of our total revenue mix in the fourth quarter 2016.

That’s our fifth consecutive record quarter for our SaaS software and services revenues all five quarters since our acquisitions of Ctrack.

The Ctrack business continues to drive our overall progress into the world of comprehensive IoT solutions, with our Inseego North America IoT business formerly known as our FW business also making great strides forward.

In just one year, we’ve grown our subscriber base for our IoT solutions to 620,000 total subscribers at the end of 2016 from approximately 520,000 subscribers at year end 2015. Breaking down that subscriber base into our historic three categories.

In the fourth quarter, our Ctrack fleet subscriber base grew year-over-year by 18.4% ending the quarter with 187,000 Ctrack fleet subscribers. Our other Ctrack Telematics subscriber base grew year-over-year by 22.5% to 245,000 subscribers. And our Inseego North American IoT subscriber base grew year-over-year by 16% to 188,000 subscribers.

I’ve often said, that for recurring revenue company subscriber growth is a leading indicator of revenue growth.

And with our continuous growth in subscribers for our SaaS software and service solutions, we continue to drive toward a new financial profile, led by higher margin recurring revenue offerings, which would reduce volatility and financial results and enable better investment planning and expense management.

Going forward we plan to provide you with a bit more color and granularity on our subscriber base because our subscriber spend different vertical markets with varying economic profiles rather than using our historic categories of subscribers, we plan to group our subscribers into categories of vertical markets that are consistent with peer companies.

This will enable you to have more visibility into how we view our own business and all you to better compare our subscriber metrics with those of other companies in the industry. For each of these subscriber groupings, we plan to start discussing and disclosing number of subscribers, revenues, ARPU and churn.

Now move on to details of our fourth quarter results. Total revenue in the fourth quarter of 2016 was $52.9 million down 14% from $61.5 million in the fourth quarter last year. This decline was driven by reduced MiFi hardware revenues and was partially offset by an increase in our SaaS software and services revenues.

We generated $14.9 million in SaaS software and service revenue in the fourth quarter of 2016. An increase of 18.3% from $12.6 million a year ago and growth of these higher margin revenues increased gross profit by 2.4% in Q4, 2016 as compared to Q4 last year on $8.6 million less total revenue.

Our hardware revenues declined to $38 million in the fourth quarter of 2016 down to 22.3% from $48.9 million in the fourth quarter of 2015. This decline was primarily driven by the delay of launch of our next generation MiFi hotspot product of Verizon.

We had expected that product to launch on the fourth quarter 2016, but instead launched in January 2017. In anticipation of the new product launch, Verizon reduced their orders of prior generation MiFi hotspot [indiscernible] launch had a significant negative impact on our fourth quarter revenues.

This was a very difficult reminder of the challenges in running a lumpy hardware business with one primary product and one major customer.

as compared to a high margin recurring revenue business with a diverse customer base, news to say, this is also why we’ve been laser focused over the past year on improving our mix of overall revenues towards our high margin SaaS software and service offerings. While de-prioritizing lower margin hardware only product line.

Our Ctrack operation significantly contributed to our fourth quarter results. With Ctrack revenues of $16.9 million above the midpoint of our Q4 guidance range for Ctrack revenues and increasing from $16.6 million a year ago, driven by the increasing recurring revenue stream from Ctrack’s growing subscriber base.

Remember that in Q4 last year, Ctrack had a higher mix of hardware revenue then in a typical quarter. And with Ctrack hardware revenue being recognized upfront Q4, 2015 was bit of an outlier for revenue performance.

Non-GAAP gross margin was a record 39.9% in the fourth quarter 2016 increasing by 6.5% and 33.4% in Q4, year ago driven by the additional and improved mix of revenues and profitability generated by our SaaS and other recurring solutions.

Our non-GAAP gross margin from SaaS software and service revenues was 69.5% in the fourth quarter 2016 up from 63.6% in the fourth quarter of 2015 riding the strength of our comprehensive IoT solutions.

Our non-GAAP gross margins from our hardware revenues increased to 28.2% for the fourth quarter 2016 compared to 25.7% in the fourth quarter of 2015 primarily as a result of reduced sales of lower margin legacy hardware products in the fourth quarter 2016.

Our non-GAAP gross margins for Ctrack products which I’ll remind are a mix of hardware’s and SaaS software and services sold as bundled Telematics solutions with 64.5% in the fourth quarter, 2016 compared to 60.5% in the fourth quarter 2015.

Our non-GAAP operating expenses were $20.2 million in the fourth quarter 2016 decreasing 11.8% from $22.9 million in the fourth quarter of 2015. The expense reductions were driven by the restructuring actions we undertook in the third quarter of 2016 as well a determination of commitments to prior MiFi customers in the fourth quarter.

While we achieved our cost savings as targeted, we’ve taken further restructuring actions in the first quarter 2017 in order to position the company for its decreased operational footprint in North America following the previously announced divestiture of the MiFi business. Our adjusted EBITDA for the fourth quarter was $2.6 million.

While this was significantly higher than a negative $100,000 adjusted EBITDA from Q4, last year, it was below our expectations for the quarter because of the shortfall in hardware revenue associated with the MiFi business.

This spares [ph] repeating from earlier, our subscriber based SaaS software and services business met our expectations in the fourth quarter. Our shortfall in revenue and in adjusted EBITDA related to the MiFi business and the decreased gross profit that resulted from those decreased revenues.

Ctrack generated $2.4 million of adjusted EBITDA in the fourth quarter of 2016 and we’re recently investing to drive continuous growth in Ctrack subscriber base and recurring revenue stream.

Our non-GAAP net loss per share in the fourth quarter was negative $0.5 per share as compared to non-GAAP net loss per share of negative $0.04 per share in Q4, last year. In terms of how we calculate our non-GAAP financial results as always a reconciliation of our GAAP to non-GAAP financials is contained in our press release.

In the fourth quarter, we did have an usual item as compared to prior quarters. This was an $11.5 million inventory impairment charge relating to the company’s discontinued Enfora standalone hardware product line. While working on the divestiture of the MiFi business, we decided to exit the Enfora hardware business as well.

In part because this was money losing business but also because the key engineers will be transitioned out of the company as part of the MiFi divestiture. While this is a sizable write down, I’d point out that a clean break from this part of the company’s hardware passed will prevent it from impeding the company’s SaaS software and services future.

Turning to the balance sheet, cash and cash equivalents were $9.9 million at the end of fourth quarter declining from $17.2 million at the end of the third quarter. We continue to monitor the company’s liquidity position as the MiFi divestiture transaction has extended longer than anticipated while we await regulatory approval from CFIUS.

Consuming capital with new MiFi product launches and ongoing operations. While inventory was down $8.8 million at year end as compared to the end of Q3 that was largely due to write down of Enfora inventory that I just described.

Otherwise inventory would have risen a $2.7 million at year end as we built MiFi inventories in preparation for the new hotspot product launch with Verizon. The decrease in accounts receivables and increase in accounts payables at year end as compared to the end of Q3 was also primarily related to the MiFi product launch and MiFi operations.

Finally on our share count, our weighted average shares outstanding was 54.9 million shares in the fourth quarter increasing by 1 million shares from 53.9 million shares in the third quarter. And now very briefly, I’ll discuss our first quarter guidance which is a bit unusual for us due to the pending divestiture of the MiFi business.

Due to the ongoing regulatory approval process, we’re not going to give full Q1, 2017 guidance. We will continue to provide visibility into the Ctrack business however as we’ve done in the past. Ctrack solutions are expected to contribute $15.5 million to $17.5 million of revenue in the first quarter of 2017.

With Ctrack non-GAAP gross margins of 60% to 65% and adjusted EBITDA from Ctrack of $2 million to $3 million. It’s important to note, that Ctrack’s revenue in the first quarter typically has some downward seasonality as compared to the fourth quarter. Last year in the first quarter of 2016, the Ctrack business generated $15 million of revenue.

Which was a 10% decrease, a decrease of $1.6 million sequentially from $16.6 million of Ctrack revenue in the fourth quarter of 2015? Ctrack, as an independent company Ctrack recorded a six-month timeframe so it wasn’t necessarily visible.

Looking at Q1, 2017 and beyond we are now attempting to drive Ctrack revenues higher as we gain increased traction in competitive markets. As demonstrated by our continued growth in subscribers. I’m not going to provide advance guidance for Q2 or for the rest of 2017 at this point.

But we may consider targeting higher revenue levels than previously for our IoT SaaS software and services solutions. With an associated reduction and previously target adjusted EBITDA levels in order to achieve the enhanced revenues. At this point, we would normally turn things over to the operator for questions.

But as Sue mentioned earlier, due to the sensitive nature of the ongoing CFIUS approval process, we need to be cautious with our public comments. As a result, we won’t be able to answer your questions at this time and will plan for another investor conference call with Q&A after the conclusion of the regulatory review process. Thank you..

Ladies and gentlemen, the conference is now concluded. Thank you all for attending today’s presentation and you may now disconnect..

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