Inseego Corp.

Hello and welcome to NSEGO's third quarter 2022 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 conference specialists 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 one on your telephone keypad. And to withdraw your question, please press star then two. On the call today is Mr. Ashish Sharma, CEO, and Mr. Bob Barbieri, Chief Financial Officer, and other members of the management team. 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 those 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 Ashish Sharma, Chief Executive Officer. Please go ahead.

Thank you, Operator, and welcome to Insego's third quarter fiscal 2022 earnings call. As mentioned in previous calls, Insego is currently in a transitional phase. We shifted from being a company solely focused on designing and manufacturing hotspots to to one that leverages core technologies to provide a full suite of connectivity and mobility solutions to enterprises via our fixed wireless and SD-WAN products. Our results this quarter reflect this transition and we believe we are on the right path. We delivered a strong top line performance this quarter with revenue of $69.2 million. This level of activity met our expectations on revenue. In the quarter, we benefited from initial volume shipments of our next generation hotspot, the MiFi X Pro, to Verizon in the U.S. and Telstra in Australia. While this is an important validation of our products, as you may have heard us say that the stock carrier business carries lower gross margins, which is a contributor to why we saw our gross margin tick down this quarter. Our adjusted EBITDA was a loss of $2.5 million. EBITDA was lower than we anticipated due to the ongoing impact of high supply chain costs and a non-cash adjustment to previously capitalized development expenses that elevated reported R&D in the quarter. The majority of these costs were non-recurring in nature, so we expect our gross margin to rebound and our reported R&D expenses to decline in short order. In Q3, our 5G revenue increased 22% year-over-year and now comprises 49% of total revenue. Our software solutions represented 21% of total revenue in Q3. Both of these metrics are important as we transition the company and move towards our financial targets. In Q3, we made good progress towards our most important goal of approaching cash flow breakeven by year end. This progress was driven by the initial ramp of our enterprise FWA business. Their business now accounts for over 13% of our revenue, and importantly, boasts a much stronger margin profile than our traditional hotspot business. We've now sold 5G products to over 600 enterprises this year, with our enterprise base exceeding 1,000 customers, all in various stages of deploying 5G. Many of these enterprises follow the same path, purchase and test 20 to 50 Inseego devices to test and evaluate with the goal of deploying devices along with our software across their entire footprint. These deployments are mission critical, with full deployment occurring over multiple quarters. And it is also important to note that the vast majority of these wins are coming at the expense of competitors such as Cisco and Cradlepoint. We've also added a lot of new enterprise customers to the list of ongoing pilots. Thanks to the breadth of our 5G portfolio, we're seeing a trend of more and more customers choosing Inseego over the competition. Before I provide additional Q3 highlights, I want to share three reasons why we are confident we will approach cash flow breakeven by the end of this year. First, as many of you know, we've made substantial investments in product development and go-to-market initiatives over the past few years. This positions Synsego as the leading provider of best-in-class 5G fixed wireless access or FWA solutions to enterprises. Second, we continue to tightly manage all of our costs. We've already taken our close to $20 million cost out of the business annual run rate year-to-date and will continue to remain dedicated to our free cash flow goals no matter what 2023 will look like. On the R&D side, we've completed several key mid-band certifications over the past two quarters that will enable us to lower expenses going forward. Third, the dramatic increases in the available spectrum and network performance made possible by 5G will give rise to a host of new enterprise service offerings. And we are hearing this in all of our dialogues with our Tier 1 carrier partners. And lastly, Our carrier partners are only now beginning to roll out meaningful enterprise-focused FWA services and the plans to support them. Those are becoming more commonplace and we expect to see real expansion of this in 2023. So let's get into some examples of the customer momentum we saw in the quarter. We want a new customer in the commercial real estate sector. They cut the cord with the local cable ISP once they tested our outdoor 5G FWA solutions and experienced upload speeds of 151 Mbps. That's correct, I said upload. Another example of a new customer we recently secured is a well-known car wash chain based in the Midwest. As with all retailers, consistent uptime for video surveillance and payment transactions is paramount. The customer was facing challenges, with the satellite communications they were using as it cannot deliver reliable performance in inclement weather, which compromises their uptime. After successful testing in a number of locations, our 5G FWA solution was selected for primary connectivity, replacing their existing satellite ISP services. On the carrier side, in addition to our Telstra launch in Australia, we expanded our relationship with Grey Austria, part of the three group companies, They launched our Wavemaker FG2000 indoor solution for their business customers during the quarter. I also want to address our investments in inventory. These have been a headwind to cash flow generation and are now beginning to moderate, as you can see in our inventory position exiting Q3. Given the challenging supply chain, with long lead times of many constrained components over the last couple of years, we increased our inventory position significantly over the past few quarters. This was done to ensure we have adequate supply to meet our customers' needs in this newly developing 5G FWA market. We believe that build has plateaued and we will be able to sustain a downward trend and manage new demand without major cash needs. Considering the progress we've made on all fronts, We remain on track to approach cash flow breakeven by year end. And most importantly, we are poised to generate positive free cash flow in the first quarter of 2023 and expect to remain positive thereafter. I want to thank our employees and customers for their continued support. And I would now like to turn the call over to Bob, who will provide more details on our Q3 results.

Thank you, Ashish. Let me now review the results of our third quarter fiscal 2022. Please note that all metrics and comparisons made are non-GAAP on a pro forma basis, adjusting for the divestiture of SeaTrack South Africa, which was completed in July 2021. Please refer to our earnings release for additional details on the GAAP to non-GAAP reconciliation. Q3 revenue was $69.2 million, up 9% from the prior year and up 12% on a sequential basis. Our growth reflects higher-than-anticipated sales of our new MiFi X Pro product, partially offset by anticipated declines in 4G product solder carriers. Next-generation solutions, which are comprised of 5G devices and all of our cloud software assets, increased 19% over Q3 fiscal 2021 and represented 70% of total revenue in this quarter as compared to 62% of the revenue in the year-ago quarter. Third quarter IoT and mobile solution revenue was $62.6 million, up 10.1% from the same period last year. Our growth was primarily driven by the launch of MiFi X Pro Hotspot and further uptake of our solutions by enterprise customers, which Ashish mentioned comprised over 13% of our revenue in Q3. Enterprise SaaS solution revenue was $6.5 million, representing a slight decline on a sequential and year-over-year basis. Consolidated gross margin was 26.3%, down from 29.5% in Q2 and 28.2% in Q3 of last year. Gross margin for the IoT and mobile business was 23.4%, down from 24.4% in the prior year period and 27.3% in the prior quarter. The lower gross margin on a sequential basis was attributable to a significantly higher mix of hotspot revenue, which had lower contribution margin than we've seen of late due to higher component and distribution costs associated with the initial launch of our MiFi X Pro product. The majority of these costs are not expected to recur in Q4 and beyond. meaning margins on our carrier products should rebound in the coming quarters. Also worth noting, gross margin on our enterprise FWA sales remained robust in Q3, exceeding 40% and leaving us confident that our gross margin has ample room for expansion as we continue to scale our enterprise business. Gross margin for the enterprise SaaS segment was 54.1%, relatively consistent with the past two quarters. Q3 non-GAAP net loss was $12.4 million or $0.11 per share, compared with a loss of $0.09 per share in the prior quarter and a loss of $0.08 per share in the year-ago quarter. We reported an adjusted EBITDA loss of a negative $2.5 million, which was up from a loss of $1 million in Q2 and a loss of $800,000 in the year-ago period. The change was largely due to the supply chain costs alluded to earlier and higher than anticipated levels of R&D this quarter, which included a one-time non-cash adjustment of $700,000 related to capitalized software expenses that incurred in prior periods and also higher certification costs that will abate as we now have completed a major product launch and attain key certifications from our carrier partners. For additional details on our non-GAAP and adjusted EBITDA results, Please refer to the reconciliation tables in our press release. Cash, cash equivalents, and restricted cash at the end of Q3 was $18.1 million. Our cash usage improved from the prior quarter, but working capital consumed additional cash due to the timing of orders. For the remainder of the year, we expect our quarterly cash usage to trend lower and approach cash flow breakeven. We believe this will leave us well-positioned to generate positive cash flow on a sustained basis during 2023. We note that our expectation for generating positive cash flow next year is predicated upon a steady ramp in our enterprise fixed wireless revenue and growth in our 5G carrier hotspot sales, offset by the anticipated decline in our 4G product sales. As mentioned previously, we continue to be focused on cost and ensuring we are cash flow positive next year. We continue to prioritize growth in our higher margin enterprise sales, which we believe will have a transformative impact on our business by increasing our mix of recurring revenue, expanding our margins, and ultimately sustaining strong free cash flow over the long term. With that, let me turn it back to Ashish for his closing comments.