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spk02: 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.
spk03: 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.
spk06: 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.
spk03: Thanks, Bob. So the key takeaway from our Q3 update is that we saw steady progress against our key initiatives. And we continue to approach an inflection point in our business. As the availability of 5G enterprise FWA offerings become more prevalent, we are well positioned to benefit from the growing demand for our products. In parallel, our cloud-based software solutions have a high attach rate, providing us with a high margin recurring revenue stream. This enterprise growth, layered on top of our existing cost structure, will ultimately transform Inseego into a high-growth company with sustained profitability and positive cash flow. Thank you all for your interest and support. We look forward to taking your questions.
spk02: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. And if you're using a speakerphone, please pick up your handset before pressing the keys. And so if you are your question, please press star, then two.
spk05: And at this time, we'll pause momentarily to assemble our roster. Again, if you have a question, please press star, then one.
spk02: Our first question will come from Lance Vitonza with Cowan & Company. Please go ahead.
spk01: Hi, guys. Thanks for taking the questions. I have kind of three areas that I was hoping that we could explore. The first on the revenue side, and that is in IOP services. Revenue was up about five, six million bucks year on year. It's about a 10% increase. I'm just wondering if you could sort of help us break that down. between increased hotspots versus software, 5G versus 4G, price versus volume, any of those, any additional color on those categories would be helpful.
spk03: Hey, Lance, great talking to you. This is Ashish. So let me take that. So first, good question. I would say There are two components of increase year over year in that revenue. One is the new hotspot launch we've had with new customer in Telstra in Australia. I would say that's net new revenue. And then number two, I would say the continued growth in our enterprise FWA revenue, that's all bucketed in that IoT and mobile revenue. So I would say those are the two main components.
spk01: Are you seeing any change with respect to the unit pricing on either side? I mean, should we just think of this as being pure increase in units that you're selling, or is there a pricing component as well?
spk03: Well, why don't we step back a little bit, right? So, Lance, you know, since I took over the CEO earlier in the year, right, we did a comprehensive review of all the businesses. And we started to change our focus from changing every type of revenue growth to more of quality of revenue and cash flow generation, right? So in that respect, I would say our highest priority right now is to grow the enterprise after business, which was a component of this increase you're talking about. And yes, the margins there are significantly higher. I mean, out the gate, we're seeing 40 plus percent margins there. That's embedded in that revenue. Number two, I would say, on the hotspot side, we're still focused on taking that revenue from key selected carrier partners. We're not chasing every carrier, you know, with low margin, you know, business because the hotspot tends to be quite a lower margin business compared to the enterprise enterprise business. And we did see an impact on our hotspot margins while the revenue increased this quarter and but we continue to see higher elevated supply chain costs, particularly given it was a brand-new product in the quarter, you know, from approval to launching it. We had to put everything on air, and so there are higher costs of shipping, and there continue to be higher component costs. So I would say that's the mix you're dealing with. As we generate more and more enterprise at the Blue Air Avenue, you start to see that margin really, you know, shift towards much more than what we see today.
spk01: Great. And so that actually answers most of my gross margin question. But just to sort of follow up on the gross margin, you did call out the elevated supply chain costs in the quarter. And I'm just wondering, do you have any ability, I would think that you would be able, like a lot of companies that we cover, to go back and pass on some of those increased costs to your customers? And I'm wondering if that – is the market just too competitive for you to do that, or is it simply the nature of the one-time nature of the cost increase that really didn't give you the time that you needed to go out and get these costs back? Or how should we think about that going forward? Thanks.
spk03: Yeah, good question, Lance. So on the enterprise product side, we have done all of that, right? We have increased the pricing, but it is still – a smaller piece of our revenue, even though it grew to 13% of the quarterly revenue this time. But I would say on the hotspot side, it is a very competitive market. Even for our carrier customers, they have certain slots out there and there's pricing and elasticity of volume with pricing on those slots. So it is super challenging for us to pass on those costs. Having said that, We've still surgically gone ahead, and in some cases, with the customer's consent, increased the pricing. But still, like I said, there was just too much hotspot revenue this quarter that shifted the margins downwards, given in general the margins and hotspots are quite lower compared to the FWA enterprise margins.
spk01: Okay, understood. And then lastly on the margin, it looks like, and thank you for the detailed explanation about these non-recurring cost items that came up. It seems as though they came up very late in the quarter. I don't recall you identifying these when we spoke three months ago on the earnings call. So my question is, do you feel confident in your visibility as you sit here today with where we are as it relates to the fourth quarter and sort of the turnaround in in margin, or do we have to worry that, well, gee, there could be some other one-time items that come up that crop up over the next 60 days or so?
spk03: Yeah, Lance, given that the launches of the new product, at least two big ones, were executed this quarter, we are fairly confident that we're going to see improved margins next quarter. I don't see those type of headwinds hitting us again.
spk01: Okay. And then just shifting, if I could, last, and then I'll wrap up, I promise. But on the balance sheet, I would imagine that given your relationship with Foxconn, that your minimum cash balance is quite low. But could you talk about that? I mean, how much cash? I know you have the revolver, which is great. But, you know, is there sort of a minimum cash balance that we should expect that you will need to stay above just from the standpoint of operating the business? And then I know you have a couple of years. I know it's early. You have a couple of years. But could you talk also about how you anticipate addressing the convertible note maturity in May of 2025, I believe it is? Thanks.
spk03: Yeah, Lance, so let me give a high-level overview there, and then I'll ask Bob to chime in here. So three things I want to highlight, right? One, that we took out $20 million in cost this year as a run rate already. So that's one. Number two is the inventory, as I mentioned in the script, we were running pretty high on inventory given the long lead times and trying to just really manage the supply chain costs by putting stuff on the boat and by trying to pre-buy with long lead items, right? So that's moderating now, and that's going to trend downwards, so it relieves pressure on spending more cash there. So that's number two. And number three, and the most important one, is We're seeing, you know, a lot of traction in our enterprise after business with, you know, already this year we have signed up hundreds of new customers with high margin revenue. So combination of those three, you know, Bob's team has done very, very detailed modeling. We're fairly confident with the cash and the revolver we've got. We don't plan to use the revolver for our cash needs. It's mostly... for some working capital changes in the quarter we go through here and there. But we'll be able to manage the business pretty tightly moving forward with those three different things I talked about. So, Bob, if you have anything to add.
spk06: Yeah, hello, Lance. I mean, the only things that I would add, and, you know, you've been with us, so you know this. The heavy investment in the two transitions, the transition, the fixed wireless and having the correct portfolio positions, And then the second transition from call it earlier or previous generation 4G and even previous generation 5G to new generation 5G and hotspots, we've already made those investments. So first, from the investment need, we feel really good that, of course, we're going to spend some money, but the heavy lift is behind us. Second, we wanted to avoid what some other companies found And they were stock outs and limited to what they could supply. So if anything, we intentionally inventoried up, so to speak, to that. We now have very, very good optics by SKU as to what the demand cycle should be. So we'll moderate those down. And then Ashish also mentioned the cost. And it wasn't, you know, when we talk about cost, it was really we don't need the same investment. I do want for the audience to kind of focus on, you know, this is not a company full of waste. Instead, it's a company who invested heavily in what they saw as a great 5G opportunity. And as such, we now have that behind us so we can reduce costs, not by cutting bone and muscle, but by just correctly sizing since we do have all of those investments already in place. Hopefully that helps, Lance. But, you know, feel free to ask a follow-up.
spk04: Thanks, guys. Appreciate it.
spk05: Thank you, Lance. Again, if you have a question, please press star, then one. The next question will come from Mike Lattimore with Northland Capital.
spk02: Please go ahead.
spk04: Hi, this is Aditya on behalf of Mike Lattimore. Could you tell me what was international as a percentage of revenue?
spk05: Hey, Ditya.
spk04: Hi.
spk03: So one thing I would say, Ditya, traditionally we have not broken out our international revenue as a percentage. This quarter, I would say, given the big Telstra launch, that that was a significant part of the revenue.
spk06: Yeah, so that's... So I would say we don't give out that specific granular, but it was over 10%. So we took advantage of a good opportunity with Telstra, and we satisfied that.
spk04: All right, fine. And could you give some color on if you're seeing any hesitancy among the enterprise buyers given the macroeconomic concerns?
spk03: Good question. So from our perspective, 5G has quite a bit of momentum in the enterprise and SMB market because if you look back to when the pandemic began, the broadband, access to broadband and internet became the lifeline for a lot of those businesses and customers. And so from our perspective, we see this As I mentioned in the previous call, we see this as an essential services that every enterprise, every employee of the enterprise needs to have. And 5G actually gives them a totally untethered capability, you know, based on location, irrespective of the location of where the employees are based. So we're not seeing any slowdown from the enterprises on evaluating and then continuing to deploy 5G.
spk04: All right, fine. That's helpful. Thank you.
spk05: Thank you, Aditya. Again, if you have a question, please press star, then 1. This concludes our question and answer session.
spk02: I would like to turn the conference back over to Mr. Ashish Sharma for any closing remarks. Actually, sir, it seems that we actually have another question that just came through, and that will come from Mr. Scott Serrell with Roth Capital. Please go ahead.
spk00: Hey, good afternoon. Thanks for taking the questions. Ashish, I apologize. You probably covered this earlier in the call, but I just hopped on. Could you take us through the gross margin impact issue? you know, headwinds on that front, I'm sure, from a component availability as well as some of the logistics issues. Can you take us through kind of where we are today and how you see that progressing over the next couple of quarters and give us a quick update in terms of how the supply chain impact is looking right now?
spk03: Yeah. Hey, Scott. Nice talking to you. Thanks for the question. So, on the gross margin front, you know, we had a couple of things happening this quarter. You know, one, positive that our enterprise, FWA business, you know, grew quite a bit this quarter, and it's now 13% of overall revenue. And that's a very high margin revenue, 40-plus percent margins on that. But we also, you know, had significant stocking orders from a couple of very big hotspot launches we did this quarter. And that kind of you know, took the margin down because the hotspots were facing higher supply chain costs given it was new launch in the quarter. We had to put everything on the air, and the lead times were still a little bit long, so we had to, you know, order a bunch of the material well in advance. So those are a couple of things happening in the quarter. I would say moving forward, Scott, irrespective of what you saw in the gross margin. One, we will definitely improve the gross margin next quarter. We don't see all of those things repeating again. And number two, we're quite a bit focused on free cash flow generation into Q1 and getting very close to cash flow breakeven this quarter. And that's really driven by three things I mentioned earlier. One is the growth in our enterprise at February revenue, which is a great highlight. Number two is we did take out over $20 million in costs from the business given our change in focus from chasing more quality revenue versus the quantity of revenue. And that focus is all about enterprise FAA. And third is that, you know, this new hotspot got launched this quarter. And so, you know, so now we don't quite, we're not quite facing the same supply chain pressure that we did in this quarter. And so in Q4, that should come up. So that's kind of a quick summary of how we're thinking about both the margin and the cash flow.
spk00: Perfect. And Ashish, if I could just follow up on the fixed warehouse access comment. 13% is a big number in the September quarter. Could you calibrate us in terms of what it was in the June quarter that And then maybe help us understand the customers and the geographies that are ramping in full volume right now, what we should expect over the next couple quarters for that product line.
spk03: Yes, Scott. What I would say is that geography is predominantly North America right now because the couple of carriers here are the most aggressive one on enterprise FWA versus the carriers internationally. So most of it was coming from North America. And I would say just a ballpark, you know, that number is, you know, north of, you know, 50% what we saw in the previous quarter.
spk00: Great. Okay. Thanks so much, guys.
spk03: Thank you, Scott. So I'm going to just summarize now. Thank you, operator, and thank you, everyone, for joining us on the call today. We look forward to updating you all next quarter on our continued progress. Thank you again.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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