Inseego Corp.

Hello, and welcome to Insego Corp's fourth quarter and four-year 2022 Financial Results Conference Call. Please note that today's call will be recorded. All participants will be in listen-only mode. Should you need assistance, please signal conference messages 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 might press star, then 1, your telephone keypad. To withdraw your question, please press star, the two. On the call today are Ashish Sharma, CEO, Bob Barbary, Chief Financial Officer, and other members of the management team. During this call, non-GAAP financial measure will be discussed. A reconciliation to the most directly comparable GAAP financial measures is included in the earnings release, which is available on the investor section of the company's website. An audio replay of this call will 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 that 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, sections contained in today's press release. I would now like to turn the call over to Ashish Sharma, CEO. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thanks for joining us. Before we dive into our results for the quarter, I want to step back and reflect on my first year as NSEGO CEO. I will highlight three major areas of progress. First, I'm happy to report that we have now transformed Insego into an enterprise fixed wireless access company with the momentum we saw in 2022, especially in Q4. This is evident from the following. Our FWA business now comprises 30% of our revenue, while cloud software has grown to represent an incremental 27% of our revenue. As we have discussed on prior calls, These two businesses produced significantly higher gross margins than our legacy hotspot business. This was evident in our Q4 results, which saw our gross margin increase by 390 basis points to 30%. We expect to further expand our gross margin in FY23 and beyond as enterprise adoption of FWA and our cloud solutions continues. We've established our FWA and managed software offerings as the leading 5G WAN portfolio in the industry. We have a large and growing pipeline with dozens of large, well-known enterprise customers. They are loving our solutions. They will look to roll out deployments to their distributed sites as the carriers get more adept at pricing 5G enterprise service plans and network coverage improves. We are seeing that improvement every day. We are encouraged by our progress, but we recognize that the enterprise FWA market has taken time to develop and will evolve gradually over the next several quarters. Second, beginning Q2 of 2022, we put in an intense focus on rightsizing the company cost structure while the FWA market develops. So we drove several significant initiatives to run the company more efficiently. First, We identified geographic regions where initial interest was high, but the availability of 5G service offerings is lacked. So we exited those markets. Japan is a good example of this. Second, we're being more disciplined in our pursuit of any new stock device programs with carriers and will focus only on a few premium slots. Given the requisite high level of sustained R&D investments and certification costs, as well as the lower margins relative to our enterprise opportunity, we think this makes good sense. And third, we have reduced our infrastructure, headcount, and external spending costs globally, as many technology companies have also done. So what effects did these changes have? In total, we've eliminated approximately $32 million in annualized cash spend from our cost structure as we enter 2023. Third, I want to address our balance sheet and cash flow expectations. Between the growth in our high margin enterprise business and the significant cost actions we have taken, we expect to reach cash flow positive in Q2 and build upon that progress over the remainder of the year. This has been a top priority of the management team during 2022, and we are pleased with the progress towards achieving this important milestone. In total, we sold to a few dozen new enterprise customers in the quarter and ended the year with well over 1,000 customers. Importantly, over 90% of our enterprise sales in Q4 included software, which obviously contributes to our overall margin improvement. Let me also address the revenue decline that is driven by lower sales in our hotspot business. The transition from 4G to 5G with our carrier customers continued last quarter as they reduce purchases of 4G products and transition completely to 5G. We have talked about this in the last couple of earnings calls. In addition, in 2022, we had carrier upgrades in our 5G hotspots to deliver the latest Qualcomm chipsets, which added some variability during the year. Our hotspot business has normalized to a new level focused only on the business segments. Over the last couple of years, we enjoyed the sole spot with some large carrier customers, but as the market has matured for 5G hotspots, they've introduced other competing products. So while our hotspot is the flagship enterprise product of choice with those large carrier customers, the volume for other market segments is now shared by other hotspots. Although lower hotspot sales represented a drop in our top line, the impact on our profit dollars is far less substantial due to the gross margin improvement driven by the better mix of higher margin businesses I just mentioned. So that was the progress on those three areas. Next, let me provide a brief summary of our Q4 results. In Q4, we generated revenue of 52.9 million and an adjusted EBITDA loss of 3 million. Importantly, we continue to see enterprise FWA trials convert to deployments. It is important to note that very often customers who purchase our FWA products begin with a small initial pilot with five to 20 devices, which progresses into full-scale deployment over time for hundreds or thousands of locations. We have now been in the enterprise FWA business for a little over a year, and we are seeing pilots convert to deployments. Our FWA business now accounts for about 30% of our revenue. Contributing to our enterprise FWA success is the new go-to market programs we put in place with all three large carriers in the U.S. who are helping us build this new FWA market. We've discussed end markets in previous calls, but some examples of new enterprise customer wins are in multi-location retail and restaurants, construction, home builders, and the SD-WAN space. Our home builder and construction customers are deploying our solutions to establish broadband services for new sites. Utilizing 5G, they can establish that connectivity instantaneously when compared to traditional ISVs. The applications that 5G enables for this sector include material tracking, surveillance, ARVR, real-time monitoring for OSHA compliance, and reliable uptime for workers that depend on mobile applications on the job site. One of these early adopters is a new addition to our pipeline, another Fortune 500 home builder. They're now exploring applications enabled by our products to support their smart home initiatives. In the retail space, we continue to expand our footprint with existing Fortune 1000 customers spanning grocery chains, QSR, farm and agriculture supply, and apparel. We are pleased to win a major off-price retailer with roughly 3,500 stores in the U.S. alone. We will begin shipping products to this customer in Q1. In the SD-WAN space, we've won a large customer in the Middle East who is rolling out our solution as part of their SD-WAN service offerings. In Seco's products are deployed as part of this customer's virtual edge platform. They've already shipped thousands of units to this customer. We believe we are very early in the adoption cycle for enterprise FWA, but the market is changing rapidly as 5G networks are completed. We have seen this in how our pipeline has grown over the past year and the nature of the customers evaluating our solution. With that, let me turn the call over to Bob, who will provide more details on our Q4 results.

Thank you, Ashish. Let me now review the results of our fourth 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. Q4 Revenants. was $52.9 million, down 27% from the prior year. The decline primarily reflected lower sales of our legacy hotspot products. As Ashish mentioned, our FWA business comprised 30% of total revenue and grew 122% over the prior year period. Next-generation solutions, which are comprised of 5G devices and all of our cloud software assets, decreased 9% over Q4 fiscal 2021 and represented 74% of total revenue in this quarter, as compared to 58% of revenue in the year-ago quarter. Software revenue accounted for 27% of total revenue and increased 6% from the year-ago quarter. Fourth quarter IoT and mobile solution revenue was $46.3 million, down 30% from the same period last year. The decline was primarily driven by reduced sales of our hotspot products, partially offset by continued uptake of our solutions by enterprise customers. Enterprise SaaS solutions revenue was $6.6 million, relatively flat both sequentially and year over year. Consolidated gross margin was 30.3%, up 390 basis points from 26.4% in Q3, and 490 basis points from 25.4% in Q4 last year. Gross margin for the IoT and mobile business was 28%, up from 23.4% in the prior quarter, and 22.1% in the prior year period. As Ashish alluded to in his comments, the meaningful improvement in gross margin on a sequential and a year-on-year basis was attributable to a significantly higher mix of enterprise fixed wireless revenue. Recall that the contribution margin on the hotspot products has been negatively impacted post-pandemic by higher component and distribution costs, so the reduction in the associated revenue did not material impact our gross profit dollars. We continue to see gross margin on our enterprise fixed wireless sales exceed 40%, which leaves us confident in the trajectory of our gross margins and further margin expansion from here. Gross margin for the enterprise SaaS segment was 56.7%, up slightly compared to the sequential and prior year periods. Q4 non-GAAP net loss was $11.8 million or $0.11 per share compared with a loss of $0.11 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 $3 million, which was higher than the loss of $2.5 million in Q3 and the $1.2 million loss in the year-ago period. Included in the loss this quarter was approximately $1 million in expenses that we do not expect to recur going forward. As Ashish mentioned, our efforts to identify additional operating expenses has resulted in the elimination of approximately $10 million in cash expenses during Q4. We note that this reduction is incremental to the $20 million in annualized cost savings we highlighted last quarter. 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 Q4 was $7.1 million. Our cash usage was impacted by the timing of our year-end payroll, payments made to suppliers, and one-time expenses related to our cost reduction efforts. As Ashish noted, We expect our cash balance to trough near the current levels and increase beginning in Q2 of this year as we reach an inflection point in free cash flow generation. We expect EBITDA and cash flow positive in fiscal 23. Our FY23 outlook also assumes a steady increase in our mix of enterprise fixed wireless business throughout the year, continued improvement in gross margin from the 30% achieved in Q4-22, and a full realization of the over $30 million in reductions in costs recently implemented. Although we are not providing specific quarterly guidance, we expect to see the usual seasonal trends in our business with revenue declining slightly sequential from Q4 to Q1 before ramping higher in the back half of the year. In formulating our EBITDA and cash flow expectations, we've taken a conservative view of our hotspot business, particularly with respect to the pace at which our carrier partners will continue to transition away from 4G products. That being said, there may be quarters where the timing of restocking orders or the pace at which our enterprise business scales could create volatility in our reported revenue and gross margin. We will endeavor to highlight these impacts should they occur over the course of the year. With that, let me turn it back to Ashish for his closing comments.