This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Thank you. Thank you. Thank you. Good afternoon and welcome to INSEGO 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. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity for analysts to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. 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 would now like to turn the call over to Dan Mondor, Chairman and CEO. Please go ahead.
spk05: Hello, everyone. It's great to be with you today, and I hope everyone is staying safe and healthy. I'm proud that NSEGO 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 are 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're rapidly adding numerous new customers in our target market. Let me touch on a few important developments in each. MSEGO 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, US Cellular, is now a customer. You should expect to see additional announcements like this as the MiFi M2000 becomes the gold standard 5G hotspot in North America. We're also making great progress internationally, and I'm pleased to announce Swisscom is 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 our 5G products is the first part of our growth strategy. and we're 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 and 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 Insego 5G technology integrated into each and every enterprise 5G use case. Second is our recently announced SaaS platform called Insigo 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 of devices once they are connected to the network. We are seeing strong demand for these offerings, and we'll be making customer announcements on this in the near future. Moving on to our C-Track business, I'm pleased to report that fleet unit bookings have returned to pre-COVID levels. As we discussed on the prior calls, the C-Track 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've provided uninterrupted service during the pandemic, while winning several more municipal fleet customers and returning sales levels to pre-COVID levels. I'm 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're making on the fixed wireless front. Thanks, Dan.
spk07: 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 enterprise 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 billion today to $65 billion in 2030, a CAGR of 60%, the majority of which will be 5G. In addition to this private 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're announcing a new portfolio of 5G enterprise products that will deliver connectivity for a wide range of private and public sector enterprise use cases. Atomized customers have special requirements, including alternate WAN connectivity options, enterprise-grade security, industrial-grade reliability, 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 21. At Insego, we believe the combination of 5G capabilities, edge computing, and machine learning software will radically change the way organizations do business. With this in mind, we're 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 up and operating. The accelerator there is bringing 5G leaders together in a US-based living lab 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, Congeal can help advance American 5G leadership in sectors such as healthcare, industrial, simulation and training, well-being, sports, and performance, where ultra-liable, low-latency edge computing will be the key to winning the future. All of these use cases and applications require new solutions, 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 Insego managed software suite, a set of integrated applications, all built on a common software platform. Insego Manage enables 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. I'll start with the Insego subscribe module. which is a next-generation cloud SaaS solution we formally call DMS. This subscription management system helps service providers, large enterprise customers, and government agencies handle the requisition, 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 in subscriptions in the third quarter, accelerating from the 27% sequential growth last quarter. We've also announced the commercial availability of our new Inseego Connect module, which allows IT organizations to easily configure any number of edge devices, monitor data usage, and check device health across their enterprise with powerful dashboards, alarms, reports, and real-time diagnostics. Insego Connect is already deployed by key enterprise customers, providing them valuable insights and streamlined management of their Insego 4G LAN connections. Our new Insego 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 Insego Managed Software Suite includes our world-class InsegoCare dedicated customer support with phone, live chat, knowledge base, and device configuration management. We plan to continue working with our customers to explore new software applications that will grow these recurring revenue streams. And finally, on fixed wireless access progress, our multi-band 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've made tremendous progress with our FWA portfolio and trials continue with customers in global markets. Given 5G, FWA is a new and diverse market. There is not a single product that fits the need of all customers, addresses all use cases, or operates in all environments. Our portfolio will cover use cases, for both indoor use and outdoor installations, delivering multi-gigabit 5G speeds and Wi-Fi 6 connectivity to residential and business customers everywhere, from dense urban settings to hard-to-reach rural locations. As I mentioned earlier in my comments, we see enterprise going at a category of 60%, majority of which is 5G, and FWA is included in that number. With this in mind, our portfolio was purpose-built to include several different form factors and SKUs to accommodate these variations, and we look forward to bringing them to market with multiple service providers in the coming months.
spk05: Now back to you, Dan. Thanks, Ashish. We've made tremendous progress in the third quarter, and as we enter the fourth quarter, we're 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 in SAS computing and product strategy. We also welcomed our new CFO, Craig Foster, to the leadership team, and I'm very pleased to introduce him to you now. Craig? Good afternoon, everyone. As you likely know, this is my first quarter at Insego, and I just wanted to take a second to thank everyone in the extended Insego family for making me feel right at home from day one. During my career as a CFO at Technology Investment Banker, I've always gravitated towards differentiating companies with strong roadmaps, and Insigo 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 standard platform. We believe this will provide incredible value to our customers and build long-term affinity for Nsingo products as we continue to add capabilities to the platform. Armed with a stronger platform, our corporate priorities are very straightforward. First, to continue to diversify and expand our global customer base. Second, build performance-leading products that accelerate the adoption of 5G worldwide. By all measurable means, Segal 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 12% sequentially and 44% year-over-year. In addition, we are a free cash flow positive at Q3, which is a major milestone event for the company. We continue to see robust demand for our flagship 4G products, and more importantly, 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 Insego Subscribe, in the IoT and 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, 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 Wi-Fi mobile broadband device began selling through our channel. Our NSEGO subscribe software continues to grow rapidly, percent quarter-over-quarter and is up 181 percent year-to-date. Third quarter enterprise SaaS solutions revenue was $12.9 million, an increase of 13 percent sequentially and down 14 percent year-over-year. For the C-Track business, although conditions improved compared to the second quarter, COVID restrictions continue to hamper our ability to install our customer backlog in the field, thus impacting revenue growth. Seatrack's existing customer recurring revenue base remained extremely stable during this volatile time, while hardware revenues fluctuated with local geographic restrictions around installations. 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 a rate at 16.8. So we did not see the extreme swings that we'd seen in prior quarters. As you may recall in Q2, we recapitalized 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 introduce our 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 and 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 noted an increase in freight costs, and this phenomenon continued to persist over the quarter. As of today, we have seen some relief in the costs, but nowhere near pre-pandemic levels. The margin increase has also been caused by the substantial growth by the Inseco-subscribed business. Enterprise SaaS solutions' gross margins were 6%. 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 with multiple service providers around the world. Sales and marketing expenses increased to $7.9 million and G&A expenses were $6.5 million, both of which were slightly up due to some increased activities around product launches. Our Q3 non-GAAP net income was $1.4 million or one penny 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 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'll turn the call back over to Dan. Thank you, Craig. we are pleased to be hosting a Financial Analyst Day on November 17th, which is also our 20th anniversary on the NASDAQ. We are bringing multiple new products to market, staying 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 Insigo employees who continue to work around the clock, Customer demand for 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.
spk08: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, you will need to pick up the handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question comes from Jason Schmidt of Lake Street. Please go ahead.
spk02: 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.
spk05: Great. Yeah, hi, Jason. Good to speak with you again. Yeah, the overall dynamic in the industry is challenging the supply chain, as I'm sure you've heard very 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 manufacturer and basically, as we 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 the 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're working at them every day.
spk02: 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 looks like on the MiFi hotspots. You're referring to inventory held by our customers? Correct.
spk05: I'm not going to comment on inventory levels for customers. That's that actually, quite frankly, is a strategic decision on their part. So I wouldn't want to comment on that, Jason.
spk02: Okay. Thanks a lot, guys. Thank you.
spk08: The next question comes from Lance Vitanza of Cowan. Please go ahead.
spk03: Hi, guys. Thanks for taking the questions, and congratulations.
spk05: I guess I wanted to start with, I think it's exciting to hear about this new portfolio of products focused on private networks. I know it's not going to launch until next year, but I think you said the first half of next year. And so I was wondering, Dan, 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 know, you're looking at this huge 60% CAGR product. and is it 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? Yeah, I'll ask Ashish to comment. Thank you. Firstly, thanks, Lance. Hi. We see a tremendous opportunity, 5G adoption in enterprise and in private networks is beginning to 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, and it's a compliment to our carrier strategy, quite frankly. And, Keith, if you could comment further, please. Thanks, Dan.
spk07: So, as Dan said, it's a new market in the making. It's, you know, 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, you know, licensing of the bands, the frequency bands. I mean, there was a recent option here in North America and the U.S. on CBRS, and so those are creating new opportunities. There is an ecosystem building up, so we're absolutely working with some key partners and customers to help build that market. It's a brand new market. So it's not, you know, it's not a big establishment.
spk03: It's a brand new market and we feel really good about the market. Okay, thanks. That's helpful. Could I shift gears and ask another question actually about on the On the margin performance, 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 know, you might be scrambling somewhat to deal with the surging 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, you know, and how should we think about the cadence of that ramp if it's going to ramp? Great. All right. Great question, Lance.
spk05: I think there's a lot of things happening in the margin side, but I think the short answer is there is an ample opportunity for creation for markets. You know, a couple of points that I'll comment on is, One, we're very sensitive to 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 through our contract manufacturers will continue to go down. And then we have a number of initiatives internally on how we continue to cost down the bill of materials and some things that we can do that are innovative around power shipping and some other cost reduction initiatives. And as we think about margins, we also just announced our software product and we will continue to see margins increase as the adoption of software coupled with the hardware that we're selling into the ecosystem gets through the channel.
spk04: Got it. Thanks, Craig.
spk03: Appreciate that. If I could slip one more in, I just wanted to ask 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, Dan, in your remarks. Is that sort of, you know, kind of double what we did last year? Is that a good 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 of cash, et cetera, no bank debt.
spk05: 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, you know, the increased cost for us is not due to, you know, a ginormous growth of 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 it will regress a little bit over the first half of next year. I guess to add to that, Lance, we commented last quarter We were, you know, pursuing certifications on a wide front, and there are separate certifications in North America, in the EU, in parts of Asia-Pac. So all of those are being pursued in parallel. You know, virtually that's a phenomenon that's gone through the latter part of the third quarter and really now into the fourth quarter. There's some information that you might have seen out there. To echo Craig's comment, there's a really aggressive pursuit of certifications as we speak, and that, of course, involves the non-HIT council-related expenditures. Thank you. I will pass the baton, and congratulations again. Thanks again, Lance.
spk08: The next question comes from Scott Fezzle of Stiefel. Please go ahead.
spk06: 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.
spk04: Can you repeat the question?
spk06: Yeah, sure. I was wondering if you could talk to your outlook for the demand environment around MiFi for 2021.
spk05: Well, yeah. So as we've talked in the past, we have – you know, multiple products coming to market as well as our existing products. And our new products are 5G across mobile broadband and fixed wireless. So, you know, when we think of MiFi, we kind of refer to the hotspot, but there's a much wider range and a number of SKUs coming to market in 5G. As far as, you know, the COVID dynamic and the demand, we continue to see very high demand for current generation 4G products. We're beginning to ramp our 5G products nicely, and that will go into 2021. So, you know, as we broaden the product portfolio, as we broaden the number of launches, you know, we're going to see a wide range of our 5G products ramp up. And in terms of the new paradigm, which we said before, We refer to a surge as opposed to a spike. We believe we can't forecast the future, but we believe that levels of demand for current generation products will plateau at a higher level than pre-COVID. It remains to be determined how that plays out, but as we see demand and as we get weekly updates on demand, we still see continued strong demand.
spk06: All right, great. Thank you. Appreciate it.
spk08: The next question comes from Scott Cyril of Roth Capital. Please go ahead.
spk01: Good afternoon. Thanks for taking my questions. Nice job in a difficult operating environment, especially on the top line. 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 of carriers that you're expecting to ship 5G this year or in certification process? Any numbers around that front?
spk05: We didn't break out specific numbers, no, Scott. You know, 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 lots happening, lots 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. Gotcha.
spk01: 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. You're expecting C-track 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 and ramp up now and otherwise 5G? Kind of how you're seeing that sequentially progress? on those line items.
spk05: Yeah, I guess, well, the last part first, Scott, is 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 custom launches, and we'll make announcements as those occur. Naturally, as you know, in constant with the carriers, The announcements occur 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 will have revenue in the fourth quarter from fixed wireless. And, again, as we move into 2021. I think relative to C-Track, we commented that the bookings, the level of activity, the return to pre-COVID levels, The modulating factor is always the foreign exchange and, again, the fairly large swings that we can see at times with the South African RAND. But we see a resumption and return to growth in the sea track business.
spk01: Gotcha. 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 to 30%? What kind of timeframe we should be thinking about if you guys are reaching that? Thanks.
spk05: Great question. Thanks for the question. I think that as we introduce new products, there's obviously initial builds and then there's volume-based margins. And I think when we start building our products, the initial phase is that they're below the targets that we expect. And as we build to kind of like real-time channel build plus volumes, then we think that we can get to target margins. And I think that timeline will be very, very sensitive to The channel fill 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.
spk04: Thank you.
spk08: This concludes our question and answer session. I would like to turn the conference back over to Dan Mondor for any closing remarks.
spk05: 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.
spk08: The conference has now concluded. Thank you for attending today's presentation and you may now
Disclaimer