Good afternoon, and welcome to Inseego Corp.'s Third Quarter 2020 Financial Results Conference Call. Please note that today's event is being recorded. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity for analysts to ask questions.

[Operator Instructions] On the call today are Dan Mondor, Chairman and CEO; Craig Foster, Chief Financial Officer; and Ashish Sharma, President of IoT and 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 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'd now like to turn the call over to Dan Mondor, Chairman and CEO. Please go ahead..

Hello, everyone. It's great to be with you today, and I hope everyone is staying safe and healthy. I am proud that Inseego can play a major role in helping people everywhere stay connected and productive at home.

We had a monumental third quarter with $90.2 million in revenue and $7.4 million in adjusted EBITDA, both up strongly on any measure and well ahead of consensus. In particular, I want to draw your attention to one other achievement, and that is achieving positive free cash flow this quarter.

All our major milestones and confirm the success of our turnaround strategy, which began in 2017 and point to the company shifting to a growth and cash generation phase.

We are seeing strong demand across the Board for our mobile broadband, fixed wireless access, IoT and cloud SaaS solutions, and we are rapidly adding numerous new customers in our target markets. Let me touch on a few important developments in each. Inseego recently introduced the new second-generation 5G mobile broadband hotspot, the MiFi M2000.

Verizon launched this new device in September. And as you saw announced last week, the fourth-largest carrier UScellular is now our customer. You should expect to see additional announcements like this as the MiFi M2000 becomes the gold standard 5G hotspot in North America.

We are also making great progress internationally, and I am pleased to announce Swisscom as a new 5G customer for the MiFi M2000. Swisscom is the leading service provider in Switzerland with a nationwide 5G network that covers 90% of their population.

And similarly expect to see further customer announcements in Europe, Middle East, and Asia for the M2000 in the coming months. We are very excited to announce upcoming launches of our fixed wireless access products with customers both in North America and in international markets.

These and other upcoming launches are major steps forward in diversifying our customer base and recurring revenue streams as well as continually improving our margins. Winning new domestic and international customers for a 5G products is the first part of our growth strategy, and we are also making good progress in two other important areas.

First, we are launching a new 5G product portfolio specifically for enterprise customers, which will increase our addressable market to strengthen gross margins. We are convinced the enterprise adoption of 5G will be unlike anything we have seen before, including the deployment of private networks to manage their businesses.

We want Inseego 5G technology integrated into each and every enterprise 5G users. Second is our recently announced SaaS platform called Inseego Manage, a suite of integrated software applications that will add tremendous value to our products and provide monthly recurring revenue on top of the initial hardware sale.

This product launch is a result of long running discussions with our service provider customers, all of which want better management with devices once they are connected to the network. We are seeing strong demand for these offerings and we will be making customer announcements on this in the near future. Moving on to our Ctrack business.

I am pleased to report that fleet unit bookings have returned to pre-COVID levels. As we discussed on the prior calls, Ctrack business model relies on local offices selling and physically installing units on-site at the customer premises.

This was not possible in the second quarter and into early Q3 given the government restrictions imposed in all our geographies. Thanks to the tireless efforts from all our local teams. We provided uninterrupted service during the pandemic by winning several more municipal fleet customers and returning sales levels to pre-COVID levels.

I am going to have Ashish Sharma who runs our IoT and Mobile business go into a bit more detail on our initiatives in the enterprise space, our software platform strategy, as well as progress we are making on the fixed wireless product..

Thanks, Dan. Let me provide some more details on our new growth initiatives. In addition to our service provider business, we see an even larger opportunity for our fixed and mobile solutions in that applied markets. One of the largest and newly developing enterprise market segments is private networks.

The total addressable market for this segment alone is projected to grow from roughly $600 million today to $65 billion in 2030, a CAGR of 60%, the majority of which will be 5G. In addition to the silent network market segment, there are many other enterprise opportunities where 5G would be a game changer.

So to position ourselves well in these newly developing markets, we are announcing a new portfolio of 5G enterprise products that will deliver connectivity for a wide range of private and public sector enterprise use cases.

Enterprise customers have special requirements, including alternate WAN connectivity options, enterprise-based security, industrial-grade liability and low-latency applications. That’s why we are developing solutions with software and hardware specifically designed for enterprise customers with demanding use cases.

We expect to launch these products in the first half of 2021. At Inseego, we believe the combination of 5G capabilities as computing and machine learning software will radically change the way organizations do business. With this in mind, we are pleased to announce our participation in the new 5G accelerator program at Lake Nona.

Lake Nona is a unique 17 square mile real estate development in Orlando, Florida with a Verizon 5G network have been operating. The accelerator there is bringing 5G leaders together in the U.S.-based Living Labs to create and develop new 5G use cases for commercial and residential tenants.

With a team on the ground working with partners and potential customers, Inseego can help advance American 5G leadership in sectors such as healthcare, industrial, simulation and training, wellbeing, scores and performance, the ultra-reliable low-latency edge computing moving the key to run in the future.

All of these use cases and application initiatives, which means that enterprise IT organizations need to support new network architectures.

To help them simplify the management of their network and to optimize performance, all of our second-gen 5G products support our new Inseego Manage software suite, SaaS integrated applications all based on a common software.

Inseego Manage enabled service providers and large enterprises to manage and enhance the value of 5G devices at the edge throughout their lifecycle from activation to remote management and support. Our started Inseego Subscribe module, which is the next-generation cloud SaaS solution, we formerly called DMS.

This subscription management system helps service providers, large enterprise customers and government agencies handle their acquisition, purchasing, billing and reporting of connected devices, including smartphones.

Due to significant new enhancements we have made to this solution, our subscribe service achieved 65% sequential growth and subscriptions in the third quarter, accelerating from the 27% sequential growth last quarter.

We also announced the commercial availability of our new Inseego Connect module, which allows IT organizations to easily configure any number of specialized monitor data usage and check device health across their enterprise with powerful dashboards, alarms, repose and real-time diagnostics.

Inseego Connect is already deployed by key enterprise customers providing them valuable insights, the streamlined management of the Inseego 4G WAN connections. Our new Inseego Secure module coming in the first quarter of 2021 will provide enhanced security with real-time threat detection and active mitigation of those security threats.

Lastly, the Inseego Manage software suite includes a world-class Inseego Care dedicated customer support with phone, live chat, knowledge base and device configuration management. We plan to continue working with our customers who have still new software applications that will grow these recurring revenue streams.

And finally on fixed wireless access progress. Our multi WAN common 5G RF engine which provides a common hardware platform for all of our 5G products is helping streamline and accelerate time to market for this rapidly growing opportunity. We have made tremendous progress with our FWA portfolio and trials continue with customers in global markets.

Given 5G FWAs in new and diverse market, there is not a single product that fits the need of all customers, but this is all use cases or OpEx in all environments.

Our portfolio will cover use cases for both indoor use and outdoor installations, delivering multi-gigabit 5G speed and Wi-Fi 6 connectivity to residential and business customers everywhere [indiscernible] hard to reach rural locations.

As I mentioned earlier in my comments, we see enterprise going at a CAGR of 60%, majority of which is 5G, and FWA is included in that number.

With this in mind, our portfolio was purpose-built to several different form factors and SKUs to accommodate these variations, and we look forward to bringing them to market with multiple service suppliers in the coming months. Now back to you Dan..

Thanks, Ashish. We made tremendous progress in the third quarter and as we enter the fourth quarter, we are working on many fronts in the U.S. and globally to bring the power of 5G to users everywhere. I would like to take a moment to welcome Chris Lytle to our Board of Directors.

Chris adds valuable expertise to the Board and Saas computing and product strategy. We also welcomed our new CFO, Craig Foster to the leadership team, and I am very pleased to introduce him to you now.

Craig?.

Good afternoon, everyone. As you likely know, this is my first quarter in Inseego, and I just want to take a second to thank everyone in the extended Inseego family for making me feel right at home from day one.

During my career as CFO and Technology Investment Banker, I've always gravitated towards differentiating companies with strong roadmaps and Inseego is no exception. Dan and Ashish mentioned earlier some critical platform developments, and I want to emphasize how important they are to the evolution as a company.

There is little argument that 5G is a game changer for both service providers and enterprises. And over the last year, our R&D energy has been focused on advancing our hardware offerings and integrating them into a cloud-based management platform.

We believe this will provide incredible value to our customers and build long-term affinity for Inseego products as we continue to add capabilities to the platform. Armed with a stronger platform, our corporate priorities are very straightforward.

First, continue to diversify and expand our global customer base; second, build performance leading products that accelerate the adoption of 5G worldwide. By all measurable needs, Inseego had a great quarter. In fact, it was the best quarter in seven years, which was well before any of the current management team was even working at the company.

Net revenue was $90.2 million, an increase of 4% sequentially and 44% year-over-year. In addition, we are free cash flow positive in Q3, which is a major milestone event for the company. We continued to see robust demand for our flagship 4G products and more importantly, we are seeing continued traction for our industry-leading 5G portfolio.

As a housekeeping item, last quarter we noted that we are going to be reporting our DMS business, which has been rebranded as Inseego Subscribe in the IoT & Mobile Solutions line instead of the Enterprise SaaS starting in Q3 2020. All references to prior period or year-over-year comparisons have been normalized to account for this change.

Turning to our business units. Third quarter IoT & Mobile Solutions revenue was $77.3 million, an increase of 12% sequentially and 62% year-over-year. We continue to see a demand surge that started in March with the onset of COVID.

Demand was uniformly up across our portfolio of products and our recently launched second-generation 5G MiFi mobile broadband device began selling through a channel. Our Inseego Subscribe software continues to grow rapidly with the number of subscriptions increasing 65% quarter-over-quarter, and is up 181% year-to-date.

Third quarter Enterprise SaaS Solutions revenue was $12.9 million, an increase of 13% sequentially and down 14% year-over-year. For the Ctrack business, although conditions improved compared to the second quarter, COVID restrictions continue to hamper our ability to install our customer backlog in the field. That's impacting revenue growth.

Ctrack’s existing customer recurring revenue base remained extremely stable during this volatile time, while hardware revenues fluctuated with local geographic restrictions around the solutions. Additionally, the South African rand, which is our largest FX exposure versus the U.S. dollar somewhat stabilized during the quarter.

At the beginning of the quarter, the dollar rand exchange rate was 17.3, and we ended the quarter with the rate at 16.8. So we did not see the extreme swings that we've seen in prior quarters.

As you may recall, in Q2, we capitalized the company by refinancing our outstanding convertible notes and paid off the senior term debt all with much better interest rates and longer maturity dates. Our new cash position coupled with free cash flow generation is providing us with additional opportunities to optimize our balance sheet.

We are working with our key vendors to increase our credit lines and are finding opportunities to establish direct buying relationships that could lower our component costs in the future.

In addition, we are continuing to optimize our inventory on hand and are expecting to see some improvement over the next few quarters, especially as we introduced some new products. We closed the quarter with a healthy cash balance of $42 million. From this point forward, I'll focus on non-GAAP measures.

A reconciliation from GAAP to non-GAAP is detailed in our earnings release. For the IoT & Mobile business, gross margins were 24.1% for the quarter, up approximately 110 basis points compared to last quarter and up 410 basis points versus the same period a year ago.

Last quarter, we noticed an increase in freight costs and this phenomenon continued to persist over the quarter. As of today, we have seen some relief in the cost, but nowhere near pre-pandemic levels. The market increase has also been caused by the substantial growth by the Inseego Subscribe business.

Enterprise SaaS Solutions gross margins were 64.4%, which was a 70 basis point improvement from the second quarter on improvements in hardware installations. The total company gross margins in the third quarter were 29.8%, up approximately 110 basis points sequentially.

This increase was due to our software subscriptions, sales of our 5G products and partially offset by our continued sales surge of lower margin 4G products. Q3 non-GAAP OpEx was $24.6 million compared to $22.9 million in Q2.

As planned, R&D expenses of $10.2 million were higher than last quarter due to product trials and certifications at multiple service providers around the world. Sales and marketing expenses increased to $7.9 million and G&A expenses were $6.5 billion, both of which were slightly up due to some increased activities around the product launches.

Our Q3 non-GAAP net income was $1.4 million or $0.01 per share. Adjusted EBITDA for Q3 was $7.4 million as compared to $4.4 million for Q3 2019 and $4.3 million last quarter. It should be noted that we have certainly benefited from the work-from-home movement, but we do not consider ourselves a COVID response company.

Our connectivity platform is providing solutions for macro trends that are reshaping how people work worldwide. COVID has only accelerated a movement towards a distributed workforce and the enterprise adoption of 5G to provide faster and more secure data, which only increases our potential.

In respect to Q4 guidance, we are comfortable with our ability to meet or exceed current analyst consensus. In addition, we believe that we will see some improvement in our gross margins due to an increase in 5G sales and continued growth in Inseego Manage. Thanks for listening. And with that, I will turn the call back over to Dan..

Thank you, Craig. We are pleased to be hosting a financial Analyst Day at November 17, which is also our 20th anniversary on the NASDAQ. We are bringing multiple new products to market, stay closely engaged with current customers and winning new customers in domestic and international markets.

This has both tested and demonstrated our resilience during these extraordinary times. I want to express a sincere thank you to Inseego employees who continue to work around the clock. Customer demand for a mobile broadband and fixed wireless access products is very strong, which illustrates momentum throughout our 5G product portfolio.

The upcoming 5G launches are a major step forward in diversifying our customer base and revenue streams. This will make for an exciting 2021 for the company and its investors. Thanks everyone for joining today's call. Stay safe and healthy..

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jaeson Schmidt of Lake Street. Please go ahead..

Hey, guys. Thanks for taking my questions.

Just curious if you could comment on what you're seeing from a supply situation, if there were any constraints in Q3 and how you're thinking about that situation in Q4?.

Yes. Hi, Jaeson. Good to speak with you again. Yes. The overall dynamic in the industry is challenging the supply chain. As I'm sure you've heard fairly widely, we're working diligently at it every day. We did make some moves quite a while ago as far as diversifying and strengthening our contract manufacturers.

And basically as we've mentioned before, going with Foxconn. The other important thing to mention is that we are working directly with the component suppliers, specifically those with long lead times to secure the quantities that we need.

So working with Foxconn and working very closely directly with a component providers, both together has really helped us keep the supply chain flowing quite well. As a matter of fact, not going to say there aren't challenges, but we are working at them every day..

Okay. That's helpful. And then just as a follow-up.

Curious if you could comment on what you think the inventory situation out there it looks like on the MiFi hotspots?.

You're referring to the inventory held by our customers..

Correct..

Yes. I’m not going to comment on inventory levels for customers that's actually, quite frankly, it is the strategic decision on their part. So I wouldn't want to comment on that Jaeson..

Okay. Thanks a lot guys..

Thank you..

The next question comes from Lance Vitanza of Cowen. Please go ahead..

Hi guys. Thanks for taking the questions and great quarter. Congratulations. I guess I wanted to start with [indiscernible] exciting to hear about this new portfolio of products focused on private networks. I know it's not going to launch until next year here, but I think you said the first half of next year.

And so I was wondering again, could you talk a little bit more about what those products and services look like? And do you have any flagship customers involved? I'm trying to get a sense for whether this is kind of a – you're looking at this huge 60% CAGR and is kind of like a build it and they will come, or are you working closely with customers to make sure that these launches go well and that the product and services are well received?.

Yes. I’ll ask Ashish to comment. Thank you. Firstly, thank you, Lance. We see a tremendous opportunity in 5G adoption in enterprise and private networks. It’s beginning take hold, we want to leverage our 5G expertise naturally, and that's a huge market with a very high growth. So very, very important.

We’ll be launching these products coming up early part of next year. So it's really an exciting time. It's a compliment to our carrier strategy, quite frankly. And Ashish if you could comment please..

Yes. Thanks, Dan. And as Dan said, it's a new market in the making, it's one of the growth markets we’re looking at. And as you know, there is activity happening in many countries on the private 5G and 4G licensing of the bands, the frequency bands. I mean, there was a recent auction here in North America, in U.S. on CBRS.

And so those are creating new opportunities. There is an ecosystem Omega. So they are absolutely working with some key partners and customers to help build that market. It's a brand new market, so it's not a big established market, it’s a brand new market and we feel very good about the market..

Okay. Thanks. That's helpful. Can I shift gears and ask another question actually about on the margin performance. So the revenue blew me away. But I was actually surprised to see gross margin in IoT mobility, somewhat constrained. And I'm wondering if that is to some extent timing related.

I mean, it occurs to me, you might be scrambling somewhat to do with the surge in demand.

And if that's the case, I mean, assuming that the demand continues to remain strong which we think it will, how should we think about – will there be any kind of ramp in margins? And how should we think about the cadence of that ramp if it's going rapid?.

Craig?.

All right. Great question, Lance. I think there's a lot of things happening in the margin side, but I think the short answer is, there is ample opportunity for accretion for markets. A couple of points that I'll comment on is, one, we're very sensitive to the product mix inside the company.

And so we continue to sell very fast a bunch of our lower margin products as our 5G portfolio continues to ramp up. And another point is, as our volumes increase with our new products, obviously the prices that we're paying for finished goods or contract manufacturers will continue to go down.

And then we have a number of initiatives internally on how we continue to cost down on the build materials. And some things that we can do that are innovative around our shipping and some other cost reduction initiatives.

And as we think about margins, we also – when we just announced our software product and we will continue to see margins increase as the adoption of software coupled with the hardware that we are selling into the ecosystem through the channel..

Got it. Thanks, Craig. Appreciate that. If I could slip one more in. I just wanted to ask you about R&D spend. It's running about double what you spent last year, and I know obviously you talked a little bit about that in your remarks.

Is that sort of kind of double what we did last year? Is any big baseline for Q4? And do you expect – should we think that that number is going to continue to grow maybe not quite double, but will that continue to grow in 2021 now that the balance sheet arguably has been freed up? You're sitting there with a lot cash et cetera..

Another great question. You're two for two. With regards to R&D, we will continue to see – I think there will be some increased R&D spend, but primarily the jump for us is going out and getting these certifications, so that we can launch with different carriers around the world.

So I think it's a healthy sign when you see that, but the increased costs for us is not due to a ginormous growth of a new headcount or things like that. I think that probably Q4 for us will be a relative peak for us in terms of our spending and then maybe you will regress a little bit over the first half of next year..

I think just to add to that Lance, we commented last quarter, we were pursuing certifications on wide front and there are separate certifications in North America, in EU, in parts of Asia-Pac.

So all of those are being pursued in parallel, virtually that's a phenomenon that's gone through the latter part of the third quarter and early in and out of the fourth quarter. There's some information that you might've seen out there.

So to echo Craig’s comment, there's a really aggressive pursuit of certifications as [indiscernible] course involves the non-headcount related expenditures..

Thanks, Dan. I will pass the baton and congratulations again..

Thanks again, Lance..

The next question comes from Scott Fessler of Stifel. Please go ahead..

Hey guys. Congrats on the quarter and thank you for taking my question. I was wondering if you could talk to your outlook for the demand environment around MiFi for 2021..

Can you repeat the question?.

Yes, sure. I was wondering if you could talk to your outlook for the demand environment around MiFi for 2021..

Well, yes. So as we've talked in the past, we have multiple products coming to market as well as our existing products, and our new products, 5G across mobile broadband and fixed wireless. So when we think of MiFi, we kind of refer to the hotspot, but there's a much wider range and number of SKUs coming to market for 5G.

As far as the COVID dynamic and the demand, we continue to see a very high demand for current generation 4G products. We're beginning to ramp our 5G products nicely and that will go into 2021. So as we broaden the product portfolio, as we broaden the number of launches, we're going to see a wide range of our 5G products ramp up.

And in terms of the new paradigm, as we said before, we referred to a surge as opposed to spike. We believe we can forecast the future, but we believe that levels of demand for current generation products will be as higher, will plateau at a higher level than pre-COVID remains to be determined, how that plays out.

But as we see demand and as we get weekly updates on demand, we still see a continued strong demand..

All right. Great. Thank you. Appreciate it..

You bet..

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

Good afternoon. Thanks for taking my questions. Nice job in a difficult operating environment, especially on the topline. Hey, I apologize. I got on the call a little bit late.

I was wondering – did you provide any color related to 5G mix in the quarter? Top customers or the number of carriers that you're expecting to shift 5G this year are in certification process, any numbers around that front?.

We didn't break out a specific numbers now, Scott. We're seeing 5G ramp-up quite nicely as we had expected. We continue to see a great demand and great level of interest from carriers around the world. We indicated Swisscom as a new 5G customer for us. There's certainly more in the works in both our mobile broadband and our fixed wireless.

So what's happening in loss of demand? And we see as we expected 5G ramping in the second half of this year, which it is doing and continuing throughout 2021..

Got it. And maybe just to follow-up on the outlook to the fourth quarter. I think you said you're comfortable to meet or beat the current fourth quarter estimates. I'm wondering what you're seeing specifically in some of the line items there. Are you expecting Ctrack growth? It sounds like things have bottomed there.

Is that starting to recover sequentially? And what are your, I guess, expectations in terms of fixed wireless access going into the fourth quarter? Does that start to become a big contributor in ramp up now and otherwise 5G? Kind of how you're seeing that sequentially progress on those line items?.

Yes. Well, the last part first, Scott. We expect to see fixed wireless revenue ramping up at the end of this year. It's in the fourth quarter now.

And we are actually preparing for four fixed wireless customer launches and we'll make announcements as those occur and actually as you know in cost of the carriers, the announcements occurred jointly if we're going to name names. So we have to work with them on the timing of those announcements, but fixed wireless is progressing along very nicely.

We'll have revenue in the fourth quarter from fixed wireless again, as we move into 2021. I think relative to Ctrack, we've commented that the bookings, the level of activities returned to pre-COVID levels, the modulating factor is always the foreign exchange.

And again, the fairly large swings that we could see times with the South African rand, but we see a resumption and return to growth in the Ctrack business..

Got it. And lastly, if I could, on the gross margins, Craig. Some progress this quarter given the scale, but you're still facing some basically COVID headwinds related to freight and otherwise and component availability. But it sounds like certainly 5G is going to help gross margins to the upside.

I want to just confirm that in terms of how the new products are coming in? Are they coming in that target level of 30% kind of gross margins? And then what is the timeline? And is 30% still the target on the hardware front to get the 30%, what kind of timeframe we should be thinking about of you guys reaching that? Thanks. .

Great questions. Thanks for the question. I think as we introduce new products, there's obviously initial builds and then there's volume-based markets. And I think when we think – when we start building our products, initial base is below the targets that we expect.

And as we build to kind of like a real-time channel build plus volumes, then we think that we can get to target markets. And I think that timeline will be very, very sensitive to the channel build dynamics, which are happening a little bit in Q4, some in Q1, some in Q2. And I think it's more of a second half of the year and beyond event for us..

Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Dan Mondor for any closing remarks..

Great. Thank you, operator. Well, I just want to close by saying thanks again to everyone for joining today's call. Please stay safe and healthy. Thank you..

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect..