Sue Swenson - Chief Executive Officer Michael Newman - Chief Financial Officer Tom Allen - Interim Chief Financial Officer Michael Sklansky - Investor Relations.

Jaeson Schmidt - Lake Street Rob Stone - Cowen & Company Mike Walkley - Canaccord Genuity Cobb Sadler - Catamount.

Hello and welcome to the Inseego First Quarter 2017 Financial Results Conference Call. [Operator Instructions] Please note, today’s event is being recorded. On the line today are Sue Swenson, Chief Executive Officer; Michael Newman, Chief Financial Officer; Tom Allen, Interim Chief Financial Officer; Michael Sklansky, Investor Relations.

I would now like to turn the conference over to Michael Sklansky. Mr. Sklansky, please go ahead..

Thanks, Keith. 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 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..

number one, the DMS SaaS business and number two, the sale of originally designed and third party IoT hardware. We increasingly seek to bundle IoT hardware with software and services such as our proprietary Crossroads platform.

Device management services or DMS is a SaaS platform that provides a complete shopping cart experience with powerful real-time reporting through workflow management portals. The integration of DMS with carrier ERP systems helps organization manage costs and contracts while mitigating compliance risks.

DMS is an attractive high-margin business with growth opportunities. New leadership has provided a clear vision and focus to strengthen our business for our two main customers, T-Mobile and Sprint. In addition, while not yet evident, the financial performance we have been productizing DMS to address a much larger customer base, including other U.S.

carriers, global carriers and local state and federal agencies. We believe DMS will be a contributor of high margin revenue growth for Inseego North America.

We believe the areas of IoT, upon which Ignite and our bundled IoT solutions are focused remain highly attractive markets with modest penetration and high growth, including remote connectivity, sale over and digital signage.

We continue to mature our solution of bundled hardware SaaS and services offer and continue to work with T-Mobile to jointly develop this new market opportunity.

Turning to Ctrack, while we fell short on our Ctrack guidance for the first time since we acquired the business in October 2015, I continue to believe we are on track to drive Ctrack to 20% revenue growth.

The quarterly hiccup has nothing to do with the underlying strength of the Ctrack business, which continued to move in the right direction overall during the first quarter. A significant portion of Ctrack’s revenue shortfall was driven by the restructuring of the contract with a large usage based insurance customer.

UBI accounts for approximately 15% of Ctrack revenues, with this customer being a significant portion of these revenues. We believe the economic realignment will be a positive for both sides in the long run and has already led to discussions on the potential expansion with this customer.

We also began ramping a solution with a new UBI customer during the first quarter. Despite the headwind for this segment during the first quarter, we believe UBI will be a solid contributor to growth and profitability in the coming quarters.

The majority of the remainder of the revenue shortfall for Ctrack was driven by some softness in our South African consumer and stolen vehicle recovery business, which accounts for approximately 10% of Ctrack revenues. We believe the quarterly challenges in this submarket will be remedied through improved execution.

We do not see any particular market trends in South Africa leading to the weakness. We have made some internal changes to better address this market going forward. Ctrack’s core fleet management business, which accounts for approximately 75% of overall Ctrack revenues, continues to perform very well during the quarter.

The South African business continued to perform well in the large fleet space, signing wins with Glencore and South32, both large mining companies. The UK business continued to secure wins with Marquee Brands in the government, utilities and courier verticals. Examples include Wessex Water and City Facilities Management UK Limited.

And the Australian business continued to build on strong carrier and distributor relationships to help further penetrate the government and SMB verticals with a recent win with Department of Finance Western Australia.

While year-over-year revenue growth for Ctrack was less than we expected in the first quarter of 2017, we see sequential growth resuming during the second quarter. In the back half of 2017 and into 2018, we see growth coming from both the core business and some new growth opportunities and initiatives for Ctrack.

These include number one, ramping the overhauled SMB platform into regions other than Australia such as South Africa, the UK, Netherlands, Germany and the U.S. Number two, continuing to expand Ctrack’s airport solutions business. We are responding to two separate RFPs with U.S. airlines and are hopeful our differentiated offering will be selected.

Number three, deepening strong relationships with international carriers such as Vodafone, Telstra and MTN, we have identified several global strategic initiatives with Vodafone, are jointly selling to government business and SMBs in Australia with Telstra and are hopeful to better capitalize on our MTN relationship.

MTN helps facilitate Ctrack’s deal with Cameroon and we believe our strong relationship with this carrier will lead to both similar deals in other African countries as well as other unique opportunities across the continent. Now, before establishing new opportunities with U.S.

wireless carriers, we are currently jointly deploying the ride share opportunity with a U.S. automotive company with a leading U.S. carrier. In addition, we are jointly bidding on one of the U.S. airport solution RFPs with a leading U.S. carrier.

And last, number five, we are expanding our rapidly growing FleetConnect asset optimization platform to geographic regions beyond South Africa. In South Africa, we have recently won large deployments for this compelling product, including Standard Bank. Clearly, Ctrack’s portfolio of opportunity is extremely compelling, if not industry leading.

We see two key areas of differentiation driving Ctrack’s success. 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 for many of our key competitors in these regions. Second, the breadth of Ctrack’s portfolio aligns well with targeted market opportunities in particular verticals.

A recent portfolio review of regions, verticals and distribution strategies is enabling the leadership team to prioritize and leverage successes globally, with a focus on execution. Turning to strategic alternatives, Inseego clearly owns a tremendous asset in Ctrack. However, unlocking the full extent of opportunity of Ctrack will require investment.

While we believe the sale of the MiFi business to T.C.L. would provide sufficient cash to drive growth at Ctrack, we recognize that if the T.C.L. transaction does not close, we will need to explore all other strategic alternatives for MiFi, including the sale to another entity, a joint venture or a licensing arrangement.

Simultaneously, we will begin exploring strategic alternatives for all parts of the Inseego business so as we can prepare for whatever outcome unfolds. Additionally, we will continue our ongoing efforts to streamline the business and take out any costs that don’t contribute to our key strategic initiatives.

So with that, I am going to now turn the call over to Mike Newman.

Mike?.

one, cost restructuring initiatives intended to realign the company’s cost structure with the current business environment; two, planned growth in Ctrack and Inseego North America revenues for Q2 as compared to Q1; and three, reduced legal spend as our significant litigation matter concluded in early April.

We are also providing guidance for our SaaS, software and services revenues for the first time with a second quarter 2017 outlook for SaaS, software and services revenues of $14 million to $15 million.

Ctrack solutions are expected to contribute $15 million to $16.5 million of revenue in the second quarter of 2017, growing sequentially again from Q1, with Ctrack non-GAAP gross margins of 60% to 65% and adjusted EBITDA from Ctrack of $2 million to $3 million. There is obviously one last item that I want to address on this call.

I am sure you’ve all seen the announcement today that I will be leaving Inseego due to personal and family reasons. I want to emphasize that while it’s my decision to leave the company at this time I continue to believe the company has a bright future and will become a global leader in IoT SaaS and services, including fleet telematics.

In addition, I’ll remain with the company in an advisory role through the conclusion of the sale of the MiFi business.

I am proud of the passion and dedication our employees have shown during the company’s monumental transition from a hardware-only business to a SaaS and solutions provider, and I’ll remain close to the company as it continues to execute its strategic vision.

With Inseego’s latest financing concluded earlier this week, I believe the company is well-positioned for the future and in great hands with Sue, Tom and the entire leadership team. At this point, I will turn the call back over to Sue..

Mike, thank you. And before I turn the call over to the operator for Q&A, I’d just like to take a moment to publicly thank Mike Newman for his contributions over the past several years. He joined the company at a very turbulent time and has been key to the transformation of the business.

The partnership that we had and our shared vision and values enabled us to work very well together as we worked through some very tough challenges. I know that Mike will remain interested in the future of Inseego and I know I’ll be able to count on him for sage advice and counsel. I also look forward to working with Tom Allen again.

He, too, has worked with us during turbulent times in the past and understands the business and the challenges that still face us. Having worked closely with Tom during his last interim assignment, I am confident that he will be able to provide us the support we need while we search for a permanent CFO.

With that, I will now turn it over to the operator for Q&A..

[Operator Instructions] And the first question comes from Jaeson Schmidt with Lake Street..

Yes, thanks for taking my questions.

Just want to start on that UBI contract negotiation, was it more – was the impact more due to the timing of the contract or early negotiating of the terms?.

Hi, Jaeson. Good question. That’s a contract that the company has for a while now and it really was the first of its kind and largest UBI deal, not just in South Africa, but probably in the world.

And I think, between ourselves and our UBI customer, it just got to the point that the economics of that arrangement really weren’t working going forward in terms of attracting and growing the business the way that they would like.

And while we obviously would have, over the short run, preferred not to restructure the contract because it’s a short-term hit to our revenue, over the longer term, having a restructured arrangement that allows for growth and a platform for growth and expansion is better than having a contract that was really going to run its course.

It also positions us better as we continue to try to prioritize UBI in other regions to take this opportunity to those places as well..

Okay.

And then, just shifting gears to the SMB product, any update you can provide on how traction and the reception is going in the North American market?.

Yes. Thanks, Jaeson. As you know, we revamped the UI, UX a while ago and we have been in trials with a variety of customers around North America and we have gotten very good feedback. We have taken a look at – you have heard me comment that we’ve done a recent review of our regions and the opportunities in those different regions.

And we think we have a pretty good opportunity that – maybe even better than North America in our Australia organization, partly because they are established. They have got an organization. They have got infrastructure.

It doesn’t mean we won’t continue to expand the opportunity in our other regions, but we did a little bit of a pivot as a result of some analysis that we did about the different regions. So we are pretty pleased with the progress that we’re making and the feedback has been very, very positive.

We’ll continue to develop that platform and add features and functionality as we see it appropriate, but we think we have a pretty robust and attractive offer based on what we’ve developed to-date..

Okay. And then, so you are just going back to your comments in the prepared remarks about being able to grow the Ctrack business 25%.

Any sort of timeline you can provide and how we should think about that target?.

Yes. Well, first of all, let me correct you. I think I said 20%, but we can certainly aspire to do 25%, but I think I said 20%, but thanks for the confidence. And based on – like I said, Jaeson, we have been doing quite a bit of work on – as you know, we have done a variety of things here in the old Novatel past.

And I think Ctrack has done a number of things and we are really honing in on those markets and those products that we think have the best opportunity for growth. So that’s why we feel very good about it because of that analysis that we have conducted over the last 3 months.

It’s been great to have Cobus Grove here in the United States because we can have the opportunity to interact with him more, and he certainly understands his markets and his people. So that’s why we are feeling much, much better and more confident about that..

Okay, that’s helpful. And the last one and I will jump back into queue. Just want a clarification on your comments regarding strategic alternatives and potential routes you may pursue if this deal doesn’t get done.

Do those comments relate strictly to the MiFi business or the entire Inseego umbrella of products?.

Yes. No, I think it’s a great question.

In my comments, I said that obviously MiFi is a priority and it’s something that we have obviously thought about for quite some time and set probably back to the early 2016 timeframe when we were thinking about the sale of this and have been considering this for quite some time, but I think I really said at the end of my comments, we’ll begin exploring strategic alternatives for all parts of the Inseego business.

So I think it’s important for people to understand we’re taking a very comprehensive look of what we have to do because we think there is great value here and we want to make sure we maximize it. So as far as I am concerned, nothing is off the table..

Okay, thanks a lot, guys..

Thank you. And the next question comes from Rob Stone with Cowen & Company..

Hi, Sue. I wanted to follow-up a little bit on the comments in your prepared remarks about seasonality X unexpected turbulence from things that you had mentioned with the divestiture process.

How do you think about normal seasonality? If it’s Q1 down sequentially, what’s the typical shape of your SaaS business for quarters two through four?.

Yes. That is a good question. So I will take it instead of Sue. So Ctrack folks haven’t historically seen the quarterly seasonality in Ctrack since Ctrack was a first base company listed on the Johannesburg Stock Exchange and they reported in 6-month cycles. We look at it on a quarterly cycle.

Q4 likely to seen, Q1 tends to seasonally step down from Q4, then you get a step up seasonally in Q2 since June 30 was Ctrack’s historic fiscal year end. Then it’s flattish, a little bit flattening across from Q2 to Q3 and then a step up in Q4. Now, Ctrack is just one portion of our SaaS and services business.

We have the Inseego North America business, which is formally known as the FW business. That has a more traditional North American seasonal trend where it’s – you sometimes get a little push there in Q4 due to budget flush, but that’s much smaller than the Ctrack business, particularly when it comes to the SaaS and service offerings.

So it’s really the Ctrack seasonal trend that impacts that line..

Okay, great. That’s helpful. A couple of housekeeping items, probably I’ll ask for you, Mike. One, you mentioned the expense reduction year-over-year from planned actions already undertaken.

Are you expecting to see more of that or as the revenue steps back up sequentially, should we see expenses move up a little bit along with that? Just sort of a general directional comment on OpEx..

Yes. So in the very, very short run in Q2, you should see expenses step down in large part due to savings on the legal side as a result of that litigation item. So as a result of that one item, it will step down in Q2.

But overall, I mean, look, right now, as evidenced by the EBITDA and the EBITDA margin, negative, obviously something – you can take steps to align the cost structure with the company’s revenue profile and, now, new gross margin profile of what we saw in the MiFi business. So that’s not just a MiFi-related subject though.

It really cuts across the whole business because we had a whole business to run. And so I would expect continued aggressive management of the costs to align with the revenue as opposed to wishful thinking for the revenue to magically pop up and support all the costs. Now, that doesn’t mean we don’t expect to see growth in revenue.

We are guiding to revenue growth for Ctrack. We are guiding to revenue growth for SaaS and services and the company looks to get back to consistent sequential improvement, not some dramatic onetime blip on the revenue side. So we will manage that revenue.

We will manage to the planned revenue growth, which is not wishful thinking growth, but actual realistic reasonable believe growth and the cost structures got to align to that..

Great. A question on the credit line. So you have put in sufficient capital to do what you need to for a year, I guess, $2 million to effect that transaction.

Were you in a position to repay that sooner, let’s say, in the next couple of months? Are there any additional fees to prepay the line before the end of a 1-year term?.

Not at all, not at all. Good question. There is no prepayment fees, prepayment penalties. If we prepay, we simply would pay accrued interest at that time, but there is no penalty fees or other charges for prepaying.

And in fact, when the MiFi business is divested or if it’s not divested, if there are any other divestitures, those proceeds under the loan are called for to repay the loan, again with no fees or penalties..

Great. Alright. But just to make sure I am not leaving Sue short on questions, one more for you. You mentioned targeting new carrier relationships. Obviously, there is a particular skill dealing as a small company with much bigger ones.

How do you think about the lead time to stand up a relationship like that? And I recognize none of this is brand new since you have been working with one or more big carrier customers for quite a while, but just when might we see that crop get harvested?.

Yes. That’s a great question, Rob. Each of the carriers is a little bit different. We have done quite a bit of work at looking at our global carrier strategy. And depending on the relationships we have today, which are many I think the opportunities are probably have a shorter cycle time.

We obviously want to try to deepen the relationships with the ones we have, which, again, I think would shorten the cycle time. We also think there are some interesting target ones that we don’t have an opportunity with, but I think we are – it’s certainly an important relationship for us.

And we do have some fairly high level relationships in most of the carriers, which certainly facilitates movement. We don’t have to start at the midlevel management. We can start at a more strategic level, which, when that comes top down in the carrier world, things happen faster.

So I don’t think I can give you specifics, but I think we’re well-positioned within the global carrier, call it, ecosystem. I think it’s also important to think about the evolution of the carrier world because certainly they are changing.

I think the things we have to offer today are more interesting for them because of, obviously, the penetration they have within their base business. And as you know, there are several carriers who view the kind of business we’re in very attractively.

So we think we will see where that leads us, but I’m pretty pleased about the progress we’re making there and the relationships we have. So we hope to give you more information as the quarters evolve. I think I gave a little bit of a preview on some things we have underway.

And hopefully, as the quarters evolve, we will be able to announce some specific transactions with them..

Great. That’s all I had. Thank you..

Thank you, Rob..

Thank you. [Operator Instructions] And our next question comes from Mike Walkley with Canaccord Genuity..

Great, thank you. Just a clarification for me. On the cost cuts, I think you have talked also in the call about the need to invest in Ctrack, etcetera. So, the cost cuts mainly on the MiFi business or are there other areas where you think you can cut costs? It’s the first question..

Yes. I think it’s more of a holistic approach in terms of trying to assess where we are overspending against the return that we are getting. So I wouldn’t confine that to any particular business. I mean, obviously you’ve heard us talk in the past about certain areas of business that we think are underperforming and can be cut back.

At this point though, I think, as with the strategic transactions discussion that Sue covered earlier, I don’t think there is really any areas of rationalizing our costs against our revenues that are off-limits..

That’s correct..

Okay, thanks.

And then just on a bigger picture, just with – assuming this – you get the approval on MiFi sold as any kind of thoughts on how we should think about longer term EBITDA targets or 12 months out EBITDA margins for the standalone businesses any of those type targets that you are willing to share at this point?.

Yes. Nothing has really changed from the prior view in terms of what that standalone business looks like. We talked about on this call a lot of what the factors that turned positive EBITDA into negative EBITDA related to reduced gross margins for the MiFi business, that litigation item, which also relates to the MiFi business.

We weren’t pleased with how either the Ctrack or Inseego North America businesses performed, but neither one of them – while they both underperformed against our expectations, neither one has more recurring-oriented businesses, neither one really fell off the map by more than hundreds of thousands of dollars.

I think, as we look ahead, I don’t think the outlook for those businesses really changed. We had talked about whenever the MiFi sale to T.C.L. closed. We talked about emerging from that in the first quarter following the closing with a $90 million revenue run-rate for the new business with a 5% to 10% EBITDA margin.

And I think that continues to be the goal and the focus. I don’t think anything has changed there at all. And I think when you look a year out from that, whenever that may be, I think you would expect to see growth in the top line.

Whether that translates into EBITDA margin expansion or not over time ultimately depends on how much of that growth is reinvested to drive further growth, but we certainly would expect to see growth in the top line as well as stable if not expanding, EBITDA margins over time..

Okay, thanks Michael. That’s helpful and best wishes to you and your family as you move on.

Last question for me and then I will pass the line is any kind of run-rate we should expect kind of for modeling or to think about Inseego North America given some of the changes and how you are pursuing that business from less hardware upfront sales? And is that $90 million still the right target for the combined company, given the Inseego North America kind of changing their strategies since the last time you shared that number?.

Yes. I think the $90 million is still the right target.

I think when you think about Inseego North America, you have to remember – Sue may have said this earlier, you have to remember that when you are converting from a hardware-based revenue system to one that relies on SaaS and services, hardware tends to be recognized upfront and SaaS and services over time.

The lifetime value of the customer is obviously much greater with SaaS and services, but in the short-term, as you are making that transition, it’s hard to get revenue growth – total revenue growth because you are losing hardware revenues while you are on a – you are growing the lifetime value of those customers faster, but in the short-term, the revenue is – the offsetting revenue is growing slower.

So I think you should continue to think of the – our Eugene-based operations as relatively flattish from a revenue perspective while the mix improves..

Okay, that’s helpful. Thank you..

Thank you. And the next question comes from Cobb Sadler with Catamount..

Hey, guys. Thanks for taking the questions. Just a first question on the CFIUS process, and I don’t know if you are talking about that today or not, but like from this time around, are you doing anything different or just more of the same and explain your case better? Because, I mean, I agree with you. I walk into AT&T, there is three hotspots.

Two are made by the ZTE, which is a Chinese manufacturer. I just don’t understand the situation. As you mentioned, T.C.L. already sells hotspots in the U.S. So the case to me is clear cut, but are you doing anything different this time around to help your case and when might that conclude? Sorry, yes..

Yes. Let me comment on that. I hope you could tell by my comments the – kind of the frustration that I felt out of the whole thing. We have done everything asked of us since we started the process with them, Cobb.

And as you could tell by my comments, we are confident that we are not a problem, but the opaqueness of the process has caused us to take, I would call them alternative routes, which I really don’t feel comfortable disclosing at this point in terms of what those are.

But I would tell you we are dealing with obviously directly with the CFIUS entity within the federal government and continuing to try to answer questions for them, but we are exploring some different routes to see if we can get our message across more clearly. Interestingly, I have a secret clearance as a result of the work I do in another area.

And even that was indicated to us by CFIUS that they could not share the – any concerns that they have. So we are, as I said, exploring any and all alternatives available to us, of which there are several. And I will just leave it at that.

I would just tell you, from a timing perspective, I don’t expect and Mike can say something differently, but I don’t expect that we’ll be talking about this in the next quarter..

Go ahead, Cobb..

Got it. And then just I want to talk about EBITDA. I mean, you guided next quarter for, what, $2 million to $3 million. And so maybe the business – the Ctrack business that it is probably $12 million for the year or something like that. I know you are not guiding for the year, but – so that’s kind of a base. Your churn hasn’t been that high.

And then, Mike, could you tell me – so, let’s say, if you grew 20% off of that business, maybe it’s 14 million extra or something like that next year. And usually you have got this EBITDA margin, but then you have what incremental EBITDA would be.

So like, for new revenue, you are not going to have any G&A increase associated with that revenue as it relates to EBITDA. You are not going to have probably much more marketing expense, and you are not – sales expense would probably be there.

But like for each incremental dollar next year, what is kind of – what kind of dollar – so let’s say you do $14 million just to round up, just a number of 20% x for next year, how much would drop down in dollars to – for EBITDA? So, I guess, your gross margins are maybe 65%, 70% or something like that.

It certainly won’t be that high, but it’s certainly not going to be as low as the corporate EBITDA margin, because again there is no G&A associated with new revenue. So what I am trying to figure out how much revenue that – or how much EBITDA that $14 million revenue is going to kick out.

What’s the number you think?.

So it’s a complicated question, Cobb. Swenson, it’s a complicated question because you are hypothesizing that everything else stays the same and there’s going to be – there will be some restructuring activities, cost savings activities to align with the current revenue.

So there will be a lower cost base against that increasing revenue that you’re describing.

But yes, if you assume, let’s just assume for argument’s sake that it’s a 60%, 65% gross margin revenue dollar because it’s a Ctrack revenue dollar, you don’t scale – you wouldn’t typically scale operating expenses dollar-for-dollar or $0.60 on $1 to match that.

You’re obviously going to have some sales expense, but you gain leverage as the company – as you have more revenues as a company. The real question is, ultimately, as you do that, do you reinvest those dollars in operating expenses towards growth in other regions.

Let’s say, you’re driving growth in Australia with the SMB product, which you described earlier and its gaining real traction. You’ve got to make a choice then. Do you reinvest that to grow the UK market because you’re now seeing the – it perform well in Australia to grow the UK market? I think the answer is you probably reinvest some to keep growing.

And then, obviously, given the company’s overall situation, you’d like to see some drop to the EBITDA bottom line. So that’s why I said I can’t imagine in that type of environment that you’re talking about, the company’s EBITDA margin is going to decline. The company is not going to spend like crazy to drive further growth. It would stay flat to go up.

I would imagine it’s going to go up. Other companies in this space are doing 20%, 30%, 35% in EBITDA margin. I know that there are times where we may it look very difficult, but it really isn’t rocket science.

If other companies can do that, so can we and those growth – those EBITDA margins out there are ultimately achievable as they have been for other companies..

Okay. And this does conclude the question-and-answer session and the conference call. So I would like to thank you for your participation and you may now disconnect your lines..