Dan Mondor - President and CEO Steve Smith - CFO Chris Lytle - Chief Strategy Officer and EVP, Enterprise SaaS Solutions Ashish Sharma - Chief Marketing Officer and IoT & Mobile Solutions.

Mike Walkley - Canaccord Genuity Jaeson Schmidt - Lake Street Capital Markets.

Hello, and welcome to Inseego Corp.’s First Quarter 2018 Financial Results Conference Call. Please note that today’s event is being recorded. All participants are in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity for analysts to ask questions.

On the call today is Dan Mondor, President and Chief Executive Officer; Steve Smith, Chief Financial Officer; Chris Lytle, Chief Strategy Officer and Executive Vice President of Enterprise SaaS Solutions; and Ashish Sharma, Chief Marketing Officer and Executive Vice President of IoT & Mobile Solutions.

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 our 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 now like to turn the call over to Dan Mondor, President and Chief Executive Officer of Inseego. Please go ahead, sir..

it’s fixed wireless closely followed by mobile, which is a huge positive for Inseego, since both technologies and in multiple form factors are already fully staffed development projects that are well underway. 5G momentum continues to grow as the technology ecosystem makes a big push for market introductions in late 2018.

Our activity with both leading service providers as well as our wireless infrastructure technology partners has increased. We believe 5G will fundamentally change the wireless industry, and I fully expect the impact of this technology shift to be transformational for Inseego.

So why? Well, it’s a perfect match of Novatel Wireless technology strength, proven over two decades, combined with a much, much larger market opportunity. And when I say larger, it’s larger by at least one order of magnitude, possibly two. As a result, we expect significant revenue growth in 2019 and 2020.

An equally important growth driver for Inseego is the Ctrack business within Enterprise SaaS Solutions. In the first quarter, Ctrack had organic growth led by solid recurring revenue growth in the U.K. and Europe, along with continued success in the aviation vertical.

As we have said before, the large aviation deployments take time to ramp given numerous customer stakeholders. It’s the nature of the market. Of course, everyone wants fast and everyone wants right now, but I’ll take these deals every day of the week.

The annual recurring sales opportunity in our pipeline is currently in the tens of millions of ROI and growing. To state the obvious, it’s why we’re going all out pursuing this industry vertical. Needless to say, the long-term shareholder value created by these large multiyear contracts is substantial.

For SMB and large fleet vertical markets, pipelines are also improving across all geographies and are up 15% to 25% over last year. This will be partially offset by a decline in the low-margin, capital-intensive, high-churn consumer business.

The expected decline follows our decision last year to deemphasize the consumer part of the business, and quite frankly, it was an easy decision. So why is Inseego winning new aviation opportunities in growing the pipeline? The reason is we have a purpose-built IoT platform for the aviation vertical.

It has the appropriate workflows, functionality, analytics and dashboards, and frankly, news is traveling by word-of-mouth in the aviation industry. And it seems news travels fast in aviation. We’re also encouraged by an increasing pipeline that’s well balanced between U.S. and international opportunities.

Again, while the aviation vertical deals are large and transformational, I’ll continue to caution that the timing of their deployment and revenue recognition is hard to predict. Our Skyus IoT portfolio continues to grow at a steady space and in excess of 50% year-over-year, and we will be introducing new products to the market in the near future.

We have won several new enterprise customers who are in the process of deploying our IoT solutions in a wide variety of applications. Industrial IoT markets are over $1.5 billion annually and a tremendous growth opportunity for us and at healthy margins.

We’ve recently added sales resources to capture new opportunities in the pipeline and to drive revenue growth. Our focus in this business is to easier for enterprises to manage their businesses and save money. It’s very important to note that 5G will soon enter this picture in the device-to-cloud IoT applications.

Our new DMS customer, Sprint, who signed a five-year deal to use DMS for its federal government business. Sprint chose us because of our platform -- because our platform automates complex government subscriber acquisition and supports ultra-secure workflows that meet strict compliance requirements.

Further, our cloud-based solution is proven to scale into the hundreds of thousands of subscribers and deploy within very aggressive government schedules. Our relationship with Sprint is strong in several business fronts, which is very good news for Inseego.

Now I’ll turn the call over to Steve to provide financial highlights for the quarter and guidance for the second quarter.

Steve?.

Thanks, Dan, and good afternoon, everyone. Before I get into the results of the quarter, I want to elaborate on several things. First, as said during the last conference call, we’ve gone through a comprehensive reorganization to redeploy Inseego into IoT & Mobile Solutions under Ashish Sharma and Enterprise SaaS Solutions under Chris Lytle.

IoT & Mobile Solutions includes the MiFi and IoT businesses. New development work is targeting 5G, smart IoT devices and services to expand our industrial IoT footprint in home and industrial gateway routers. Enterprise SaaS Solutions is comprised of our Ctrack asset tracking and telematics and DMS businesses.

Going forward, we will no longer report hardware and software revenue, but provide the revenue of these two units as I just described. As this is how management is tracking the health of our business, we have provided a table in the press release with a year of historical data to provide more context to these numbers.

In addition, note we are beginning to make investments in key personnel and technologies. Investments in 5G, IoT and cloud products are being made as we act on our plans and as a result of new opportunities that have materialized this year, as Dan elaborated upon.

We will see some impact to previously targeted short-term EBITDA and cash expectations on a go forward basis, but we believe the visibility and size of these opportunities merit increased investment. Second, we continue to see positive work progress improvements on adjusted EBITDA and our strategic initiatives.

As I stated last quarter, we will see cash balances moving up and down due to the result of inter- and intra-quarter working capital swings as we balance the performance of payables, receivables and inventories. Given that approximately 70% of our business is booked and shipped, this should be expected.

Finally, on the Investor Relations front, we’ll be presenting at the B. Riley conference in late May. Expect a press release will be issued tomorrow with the specifics. Now onto the quarter. As noted in our press release this afternoon, Q1 revenues of $46.7 million were up slightly from Q4 results and down 16% from the prior year’s quarter.

This was in line with guidance we provided in the March conference call. IoT & Mobile Solutions, comprised of the legacy MiFi and IoT businesses, is down 25% from the same period last year, and 3% from Q4 ‘17, largely due to continued softness in the legacy MiFi business that Dan mentioned earlier.

While we believe new products and partnerships will improve this part of the business by year-end, we expect the softness to continue into Q2, which is reflected in our forward guidance.

Enterprise SaaS Solutions revenue, comprised of hardware and software revenues from both Ctrack and DMS businesses, was $17.9 million in Q1, up $1.1 million from last quarter. Year-over-year, Enterprise SaaS Solutions revenues increased 7.4% from Q1 ‘17. We expect continued strength in both Ctrack and DMS businesses.

As Dan mentioned, we signed our DMS business to a five year contract with Sprint, and Ctrack won a major EU-based airline that almost doubles our potential addressable market from recent wins in the aviation vertical. Keep in mind that both businesses are subject to certain implementation periods, and we will not see immediate revenue spikes.

GAAP gross margin was 33.3% for the first quarter, 4.4 points up last quarter and 4.1 points higher than the same period last year. Our Q1 GAAP OpEx was $18.1 million, including $300,000 of restructuring and almost $1 million for amortization of purchased intangibles.

Excluding the restructuring and amortization, OpEx associated with R&D, sales and marketing and G&A, increased $500,000 sequentially to $16.9 million as we focused on new product investments and key hires in the sales ranks. On the same basis, spending is down year-over-year by 34% from Q1 ‘17.

Our GAAP net loss and net loss per share for the quarter was $8.1 million and $0.13, respectively, compared to a net loss of $3.8 million or $0.06 per share in Q4 ‘17 and a net loss of $16.1 million or $0.28 per share in Q1 ‘17.

Versus last quarter, it is important to note that on a GAAP basis, in Q4 ‘17, we recognized a recovery from the sale of abandoned products and recoveries on previously written-off real estate leases as well as a tax benefit associated with the new tax legislation totaling approximately $3.8 million that could not be recognized again this quarter.

Turning on to our non-GAAP metrics. Consolidated non-GAAP gross margin for the current quarter was 35.9%, up sequentially from 35.2% in Q4 ‘17 and up from 31.8% a year ago. In each case, we’ve excluded the impact of both any impairment or recovery associated with discontinued product lines.

Non-GAAP gross margins for Enterprise SaaS Solutions was 64.9% as compared to 64.4% in both Q1 and Q4 ‘17. Non-GAAP gross margins for IoT & Mobile was 18.3% as compared to 18.6% in Q4 ‘17 and increased 0.5 point year-over-year from Q1 ‘17.

During the first quarter, raw material reserves totaled approximately $600,000 or roughly 2 margin points, which should be largely behind us at this stage. With respect to operating expenses, our non-GAAP OpEx increased to $15.8 million for the quarter, an increase of $500,000 from last quarter and lower by 31% year-over-year.

Our non-GAAP operating profit was $900,000, down $100,000 from last quarter and improved $6.3 million from the same period last year.

Our adjusted EBITDA for the first quarter of 2018 was $3.3 million as compared to a $2.8 million -- as compared to $2.8 million for Q4 ‘17 and a loss of $3.2 million for Q1 ‘17 or a swing of $6.5 million year-over-year.

Our non-GAAP net loss per share in Q1 was $0.03, down $0.01 from last quarter, and an improvement of $0.11 from the same period last year due to lowered operating expenses. A reconciliation of our GAAP to non-GAAP financials is contained in our press release. Now turning to the balance sheet.

Cash and cash equivalents, inclusive of restricted cash, was $16.2 million at the end of Q1, decreasing about $5 million from Q4. Compared to the same period last year, cash and cash equivalents were up by $6.4 million -- up from $6.4 million.

As I stated earlier, we will see cash balances moving up and down due to inter- and intra-quarter working capital swings as we balance the performance of payables, receivables and inventories. You’ll note that we made substantial reductions in accounts payable in Q1. And Q -- the Q1 cash balance was within our expectations.

Finally, our weighted average shares outstanding for Q1 were 60.7 million, an increase of 300,000 shares from the fourth quarter. In Q1 ‘17, our weighted average shares outstanding was approximately 57.5 million. Now moving on to guidance. We’re pleased the company met the Q1 guidance.

We’re continuing to develop headroom within our existing budgets to allow us to make key investments in 5G and other product initiatives.

Given the increased investment and weakness in the legacy MiFi business, further exacerbated by short-term flash memory shortages affecting multiple industries, it will likely take an extra quarter or two to hit the annualized EBITDA run rate target of $20 million to $25 million and then $30 million annualized adjusted EBITDA run rate.

Accordingly, for the second quarter guidance, we expect total revenues to be in the range of $45 million to $50 million, and our consolidated adjusted EBITDA to be in the range of $3.5 million to $4 million.

Our IoT & Mobile Solutions revenues are expected to be in the range of $27 million to $30 million and Enterprise SaaS Solutions revenues are expected to be in the range of $18 million to $20 million. That ends my prepared remarks. At this point, I’ll turn the call back to Dan for his closing remarks. Thank you..

Thanks, Steve. In summary, I’m pleased with the solid start to the year despite some legacy MiFi headwinds that, frankly, are rapidly turning into tailwinds with 5G.

While there is more work to be done in operating efficiencies throughout the business, we enter 2018 confident in our financial position and we are making focused investments for growth in 2019. We’ve made key hires to accelerate sales and are taking advantage of new opportunities on our radar.

I want to assure investors, and repeating what I said before, that management will continue to take a very disciplined approach to investment. Real, worth it and winnable is always the test. We are committed and confident in improving EBITDA sequentially through the year.

Regarding the ban on Chinese vendors, we’re in the right place at the right time to fill the void. The phone has been ringing off the hook, so to speak, literally in the last couple of weeks. And make no mistake, the signal products are red, white and blue, designed and built in the U.S.

5G is the first true broadband technology that is untethered by copper wire, coax cable or optical pipes, and think about it. Now I’ve been in the front row seat in this industry as a technology supplier to enterprises and service providers around the world for four decades. Consumers and businesses live in a mobile universe, period.

This is why 5G is once-in-a-lifetime and why I’m so bullish. Combined with IoT and intelligent cloud platforms is unprecedented, it will permeate many more industries, more than we can currently predict. Our R&D teams are working around-the-clock alongside with our customers and technology partners to deliver world-class products.

What’s really weird is the articles and earnings transcripts of some of my fellow technology suppliers, which should go nameless, who downplayed the importance of 5G and some are in outer space altogether. It’s all a bunch of blah, blah, blah. I call it ostrich marketing.

Or how about Luddite PR strategy? In any case, they know they’re not invited to the party. Sorry, guys, you’ll have to sit this one out. Oh, yes, and there’s one more thing. Inseego won another large Ctrack aviation deal with a European-based global airline, further validating our leading position in the aviation vertical.

This global airline is in the top 10 worldwide and present in 140 major airports around the world. We now have 3 out of the top 10 global airlines and 2 are in the top 5.

This new airline deal alone has the potential to double the number of motorized assets from recent wins, and would be the second largest deal in Ctrack history, right behind the U.S.-based global airline win we announced earlier this year.

In closing, the transformation of our company into Inseego 2.0 is gaining momentum and the prospects for 2018 are very bright. We hope to see you in a couple of weeks at the B. Riley conference. So that concludes our prepared remarks, so let’s go to Q&A..

[Operator Instructions] And the first question comes from Tom Walkley from Canaccord Genuity..

My first question is just on this large airline deal, congrats on this deal.

Can you just give us a sense, maybe not specific to that customer, but on such a large footprint, what is the time frame? Is it quarters or years to roll out such a large project? And what could be the -- a top five airline total revenue opportunity over the life of the deal for Ctrack?.

Well, as we mentioned earlier, our pipeline right now is in the tens of millions of dollars annually, and these deals are multiyear. The U.S. airline covers a five year period. In this particular instance, the EU airline can be even a longer period of time. So it is substantial. Back to your question on timing.

As I said, everyone wants that, everyone wants right now, and we do too. It is a slow ramp. It moves to proof of concept, then to deployment ramp. And you have to remember, there’s airports around the world that this is deployed.

So it is a slow ramp, there are sizable deals, and so we expect that kind of run rate to occur in a couple of years, hopefully sooner. But the business will definitely build up over time. And what we’re focused on now is landing these deals..

Okay, understood. And then just on the legacy MiFi being weaker than expected.

Can you maybe help us think about gross margin trends in the short term? And then, where do you think gross margins could be for that division as 5G starts to ramp over time?.

Steve, why don’t you....

Yes, Mike, we expect the gross margins to improve as we move forward. As I alluded to, we took a $600,000 charge for reserve for some raw materials. And that was about a two margin-point hit in the first quarter. So we expect that, combined with newer products coming on, Dan talked about our gigabit hotspots coming in later in the year.

And we’ve not provided any real guidance for 5G, but expect 5G to be substantially better than the MiFi portfolio relative to gross margins..

Yes. I think, also, in our gigabit 4G product, now let’s face -- 5G doesn’t get universally deployed. So this is a gigabit solution that will fill the void until then. And it directionally has stronger margins than the legacy portfolio..

Okay. Got it.

But with your kind of adjusted EBITDA targets pushed out, is it just purely a lower revenue for IoT solutions this year relative to your expectations on the legacy business? Is that the best way to characterize the quarter to push out on your targets?.

Yes, it’s the softness in the legacy MiFi. And as I mentioned earlier, the headwinds turned to tailwinds with 5G. So that’s really been the driver in lowering our guidance. However, it’s a pushout, not a re-vectoring..

Okay. And then just staying with IoT solutions.

So is it fair to think it kind of bounces around this 25 million to 30 million for a quarter or two and saw 5G or new product exiting this year and then could really ramp each quarter toward 2019? Is that a fair way to kind of think about the shape of that business is going?.

Yes. We certainly see a ramp-up in ‘19..

Yes. Well, currently, you look at 5G, we’re going to see some deployment this year. And realistically, we’ll see an uptick in deployment probably in the latter half of 2019..

Okay, great. That’s helpful. Last question for me and then I’ll pass the line. Just you’re hiring some strong people to drive growth and make targeted investments.

So just on your OpEx going forward, should we expect that to just to trend up a little bit R&D and SG&A and maybe offset a little bit in the, I guess, general administrations? I know you’re still working on some projects to cut cost there..

Yes. That’s the right way to look at it. As I stated, we’re making headroom to accommodate the investments we are making..

Yes. And G&A is where we have a principal focus still and there’s more opportunity for reduction. I will say this and they want to reiterate it. I think I said it on the last earnings call. We are fully staffed in development for 5G.

This is not a recruiting effort ongoing to add resources, and that’s frankly taken advantage of the great teams here that was -- that’s worked on the multiple generations. So 5G is fully staffed.

We’re going to add selectively here and there for pockets of expertise perhaps in development, perhaps thinking about smart camera, video analytics, that sort of capability. But it’s really about executing what we have in development pipeline. And based on the opportunities we see, it’s time to muscle up, frankly, on the sales front..

And the next question comes from Mike Latimore from Northland Capital Markets..

This is [indiscernible] for Mike Latimore.

What kind of growth rate do you see for Enterprise SaaS revenue this year?.

We don’t provide guidance on full year growth rates. We have provided -- we provide guidance on a sequential quarterly basis. We have targets for double-digit growth. We talked about it. We are very encouraged by the start in Q1 with the growth rates we’ve seen in Enterprise SaaS and specifically Ctrack.

So you can project from there, relative to double digits, but we’re very encouraged and off to a great start..

Is there a gross margin expansion possibility for the Enterprise SaaS from your current levels of 65%?.

Yes. The mix – it’s depending on the mix between hardware and software. So over time, we’ve seen a reduction in the hardware content in the mix, and therefore higher recurring software. So as that business grows, and like most -- like all SaaS businesses, you have basically absorption of costs. And so on an incremental basis, it’s margin grade.

So that’s a long-winded way of saying, yes, we see upside potential..

Just one last question.

How many 10% customers were there in the quarter? And like, what were their percentages?.

How many 10% customers, is that what you asked?.

Yes, yes..

Just one, just one..

And the next question comes from Jaeson Schmidt from Lake Street Capital Markets..

Wondered if you could comment on what you’re seeing from a pricing standpoint in the Ctrack business.

Are you seeing anything out of the ordinary there?.

No. I guess, a short answer would be no. It varies between the verticals. So there is a cluster of price ranges in the -- I’m speaking about ARPU, monthly ARPU in SMB. There’s another cluster of price points in the monthly ARPU in fleet and there’s another in aviation. And those -- as you look at those SMB to fleet deviation, it increases.

So that’s the mix. So when you put it all together, you come up with a blend. But it’s really, really important to understand those price tiers..

The other thing I think we need to add is, you’ll recall Dan’s comment during his prepared remarks. We’ve deemphasized the consumer business, and that had a much lower ARPU. So I think, just by virtue of that slowly working out, we’ll see ARPUs creeping up as a result of that..

Yes. That’s a good point. Yes..

Okay. That makes sense.

And then sticking with the Ctrack business, wondering if -- looking at both your domestic business and international, if you saw a particular strength in either one of those geographies? Or if it was more broad-based?.

No. Really, it’s more broad-based. It really is more broad-based. The deployment historically has been non-North American and we’re now moving forward and especially with increased sales resources to focus now on increasing North America. It’s very balanced, it’s very broad. The solutions are universally applicable..

Okay. And the last one for me, and I apologize if I missed it.

But when we look at your 5G product portfolio, do I assume that it will be accretive to the gross margin profile?.

In IoT & Mobile Solutions, yes. We have a built-in better margin profile in 5G from day 1 and as well as in the other side of the IoT in industrial IoT products..

And this concludes our question-and-answer session, thus concluding the conference. Thank you for attending today’s presentation. You may now disconnect..