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spk00: Hello and welcome to NSEGO Corp's first quarter 2023 financial results conference call. Please note that today's event is being recorded. All participants will be in 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. To withdraw your question, please press star then 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 measures will be discussed. A reconciliation to the most directly convertible 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 FTC filings, which are available on our website. Please also refer to the cautionary note regarding forward-looking statement section contained in today's press release. I would now like to turn the call over to Ashish Sharma, CEO. Please go ahead.
spk02: Thank you, operator. Good afternoon, everyone, and I hope you're all doing well. As we've discussed on previous earnings calls, Insego is in the midst of a significant transition As 5G networks are built out, carrier data plants are rolled out, and enterprises transition from 4G to 5G for their connectivity needs. Our focus is on delivering high-quality products that meet the needs of our customers while achieving higher margins than Insego has achieved historically. Our goal is to achieve and grow positive free cash flow on a sustained basis. We are pleased with the progress that we've made, and we think our first quarter was a positive step in that regard. Our results in the quarter reflect two things. First, the hard work we've done over the past few quarters to right-size our cost structure. And second, we have best-in-class 5G hardware and software products that carriers and enterprise customers are looking for. Most notably, growth in our cloud-driven, fixed wireless access portfolio, continued to drive our business transformation this quarter, which is most easily seen in the continued improvement in our gross margins. Next, let me provide a brief summary of our Q1 results. In Q1, we generated revenue of 50.8 million and adjusted EBITDA of 4.1 million. This EBITDA is the highest in the recent company history, driven by a couple of important factors. First, we drove a better mix of our FWA and software solutions this quarter. FWA and software solutions have significantly higher margins than our traditional hotspot products, and momentum in FWA continues to grow as the market adoption increases. Our FWA and cloud software revenue accounted for about 53% of our business this quarter. It is worth noting that our FWA solutions have a higher software attach rate when deploying with enterprise and SMB customers, which further benefits our gross margins. This improved revenue mix translated into significantly higher gross margins in the quarter, increasing by 580 basis points sequentially to 36.1%. While there may be some variability around gross margins quarter to quarter based on overall revenue mix, our expectation is that mid-30s gross margins should be our new normal going forward. As our mix continues to improve over time, we believe there is room to improve from here. Second, our OpEx was 25% lower year over year, reflecting our progress in running the company more efficiently. As we've discussed in previous calls, we took significant actions in the second half of last year, the benefits of which we finally began to fully see this quarter. we are going to be extremely disciplined about maintaining our OPEX moving forward and believe we should have significant operating leverage as revenues increase. From a cash flow perspective, we were slightly cash flow positive this quarter, which is an important milestone for Insego. However, we would expect variability in our cash flow from quarter to quarter, primarily due to working capital needs as we grow, and due to interest payments on our bonds until we achieve modestly higher levels of quarterly revenue. Our clear objective is to be consistently cash flow positive, and we made important progress towards that goal this quarter. This quarter was a step in the right direction. Now let's talk a little about the progress of our FWA business. Our carrier customers continue to see increasing demand for FWA services this quarter. In fact, if you look at the public announcements of the large carriers in North America, you will find that FWA continues to grow faster than their traditional smartphone subscriptions. Our revenue pipeline and bookings for FWA are stronger than ever. While the revenue buildup will be gradual, we are seeing very positive signs of how the market is shaping up. In fact, this is the first quarter in recent memory where we had significantly more orders than we could fill in the quarter. The interest for many types of companies across a wide range of industries is growing as FWA gives them an incredibly fast and economic solution for broadband services. As we've discussed on previous calls, we are seeing customer use cases across a wide spectrum of industries, including multi-location retail and restaurants, hospitality, construction, real estate development, grocery, government, and many other sectors. Our ecosystem of carriers, channel partners, and direct enterprise sales continues to grow in lockstep with market demand, which is reflecting in a growing pipeline of opportunities. We are optimistic that we are well positioned to capture a disproportionate share of this market. In summary, we are well positioned in a very large 5G market that is still in early stages of development. Our transformation into a higher margin enterprise-focused company is well underway with a cost structure that will scale well with our revenue growth. While the FWA market will develop gradually, we are beginning to see market adoption accelerate, and we are going to track any new investments with lead customers as market develops further. we're going to be extremely disciplined from a cost perspective, something the company lacked in the past due to a singular focus on growth and winning whatever business it could, irrespective of expected margins and returns. With that, let me turn the call over to Bob, who will provide more details on our Q1 results.
spk04: Thank you, Ashish. Before I present the detailed financial information, I wanted to again reiterate how proud we are as a company to announce strong EBITDA earnings for our first quarter 2023. We've gone through an important but difficult transition in adjusting to a rapidly changing technology environment and resizing the company around the strategic opportunity of our 5G FWA target market. Let me now review the results of our first quarter fiscal 2023. Please note that all metrics and comparisons made are on a non-GAAP basis. Please refer to our earnings release for additional details on the GAAP to non-GAAP reconciliation. Q1 revenue was $50.8 million, down 17% from the prior year. The decline primarily reflects lower sales of our legacy hotspot products. As Ashish mentioned, our FWA and cloud software business comprised 53% of our total revenue and grew 35% over the prior year period. Next generation solutions, which are comprised of 5G devices and all our cloud software offerings, represented 68% of total revenue in the quarter. Software revenue accounted for 32% of total revenue. First quarter IoT and mobile solution revenue was 43.6 million, down 20% from the same period last year. The decline was primarily driven by reduced sales of our hotspot products, partially offset by the continued uptake of our solutions by enterprise customers. Enterprise SaaS solution revenue was 7.2 million, up 10% sequentially, and up 5% over the prior year quarter. Consolidated gross margin was 36.1%, up 580 basis points from 30.3% in Q4, and 810 basis points from 27% in Q1 of last year. Of this margin improvement, we did have a few one-time effects that were not expected to recur in future quarters. Excluding those items, our gross margin would have been in the 33% to 34% range. Gross margin for the IoT and mobile business was 33.4%, up from 28% in the prior quarter and 24% in the prior year period. As Ashish alluded in his comments, the meaningful improvement in gross margin on a sequential and year-to-year basis was attributable to a significantly higher mix of FWA and cloud revenue. Recall that the contribution margin on our hotspot products has been negatively impacted post-pandemic by higher component and distribution costs, so the reduction in the associated revenue did not materially impact our gross profit dollars. We continue to see gross margin on our enterprise FWA sales exceed 40%, which leaves us confident in our trajectory of our gross margins throughout this year. Gross margin for the enterprise SaaS segment was 52.7%, up from 46.9% in Q4, and down slightly from 53.3% in Q1 2022. Q1 non-GAAP net loss was $2.7 million, or a negative $0.03 per share, compared with a loss of $0.07 per share in the prior quarter and a loss of $0.13 per share in the year-ago quarter. We reported an adjusted EBITDA gain of $4.1 million, which was up from a loss of $3 million in Q4 and higher than the $1.2 million loss a year ago period. As Ashish mentioned, our cost reduction efforts were an important factor in our profitability this quarter. We believe these cost reductions preserved our 5G enterprise fixed wireless expertise and capabilities and allow us to continue to pursue this large market opportunity. Overall, these cost reductions resulted in annual savings in excess of $30 million. 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 Q1 was $8.7 million. This cash balance was up from our cash balance of $7.1 million in the prior quarter. With that, let me turn it back to Ashish for his closing comments.
spk02: Thanks, Bob. Q1 was a good quarter for us and one that we will treat as a stepping stone to keep the intense focus on creating positive free cash flow while growing with enterprise 5G adoption. I'm extremely proud of our team that has stood behind our strategy even during difficult times and helped to reposition and refocus that company quickly within the past 12 months. Thank you all for your interest and support. We look forward to taking your questions.
spk00: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If using a speakerphone, please pick up your hands up before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Jonathan Navarette with TB Cohen. You may now go ahead.
spk01: Thank you, and good afternoon, everyone. This is Jonathan on for Lance. Nice quarter and nice progress. Could you share maybe some of the biggest puts and takes of the quarter given the positive adjusted EBITDA and free cash flow? I know you mentioned the the cost structure, but anything else that you would like to point out that, you know, should be important for investors?
spk02: Hey, Jonathan, Ashish, good talking to you. So the number one thing I would point out is the change in product mix and the growth we are seeing in our FWA solutions and our cloud solutions portfolio. And that's the big that we talked about in the last quarter that we started, and you'd see that in pulsing now in this quarter with a much better mix and improved margins, and obviously the new resized cost structure is helping kick in improving the EBITDA and the cash flow.
spk01: Got it. The good performance in the first quarter, have you seen that still lower into April?
spk02: Oh, yeah. As I mentioned in the commentary earlier, we have a pretty strong backlog of orders into Q2 for FWA. Traditionally, we didn't really have that. We had a lot of which was driven by sell-through with our carrier customers. And in this case, things are different because our customers are seeing a lot stronger demand on F2A, and they're placing orders early on, and we're now in the process of fulfilling those orders in Q2. So, yes, Q2 has started out a lot stronger than many of the previous quarters.
spk01: I see. Is it fair to say that this would be like the... I don't want to say that... Maybe the following quarters are going to be stronger than the first one? Or can we maybe see some ups and downs and choppiness as the year progresses?
spk02: You know, in general, I would say, given the strong demand we are seeing on FWA, we see strength moving into Q2 and beyond. But as it is in any given quarter, right, you know, it depends on the mix of products, sell through with our large carrier customers, and then on the enterprise side, how quickly the pilots are converting into full-blown deployments, right? So it's a mix of multiple of those things. In general, I would say the trend is what you said, but I would just, you know, given we are not providing guidance because of the factors I mentioned before, we just want to tread, you know, carefully and we want to take this as a step-by-step buildup rather than some big explosive growth in, you know, in the next quarter.
spk01: That makes sense. And my last question, I know the EBL is coming due in December 24th, so Just, you know, a year and a half, if you want to call it, and just want to know if you – have there been any internal conversations already about extending the maturity of the ABL or anything along those lines?
spk02: Yeah, I mean, I would say, Jonathan, that yes, there have been internal conversations with the key members of our management team and our board, and we will – continue to look at that as we move forward and create this FWA success.
spk01: Okay, great. Thank you.
spk02: Thank you, Jonathan.
spk00: Again, if you have a question, please press star, then 1. Our next question will come from Jeremy Kwan with Stifel. You may now go ahead.
spk03: Yes, good afternoon, and congrats on the positive cash flow. This is Jeremy calling for Tori. I guess maybe a question on the gross margin. In your prepared remarks, I think you mentioned, you know, targeting the mid-30s. Is this something that you can potentially see, you know, in the next six months, or how quickly can you get to that target? And maybe a quick follow-up, would that be achievable in the long term?
spk02: Hey, Jeremy, you're cutting off a little bit, but I think you're asking, like, how quickly we can get to mid-30s. And so this quarter, obviously, we are at 36. And, yes, we had some one-time favorable business that drove that, but I would say we are there right now. And throughout this year, as we move forward, in any given quarter, there might be some variability, but we're going to be, you know, in that mid-30s. build up more and more enterprise business. We could see it go beyond that. So I would say we are on that trajectory right now.
spk03: Got it. And I guess, can you talk a little bit about maybe how you're managing your inventories right now? It seemed like you had a nice drawdown internally. Can you talk about your plans for inventory going forward and also what you're seeing in terms of the supply chain or in the channel with your customers?
spk02: Yeah, good question, Jeremy. So what we had done in, you know, sometime in late 2020 and 21 was we had built up and bought a bunch of material given the lead times had gone crazy at the time, you know, up to 52 weeks. We have been... you know, now with this, you know, this demand we're seeing on FWA, we've been, you know, building up and getting those products shipped. And so I think that's going really well for us. We're converting that, a lot of that material into finished, you know, goods now and shipping the product. And then I would say the other place we will see some – you know, some inventory, you know, swings would be on the next generation products we had released late last year on the hotspots, that those are next generation chipsets. So we're, you know, kind of monitoring those levels very carefully and yet, you know, making sure that, you know, we don't leave any demand on the table. And what's helping is, as you know, that in general the semiconductor industry is has a lot of inventory built up. So that's kind of working in our favor that we are able to now build many of these next generation products in shorter lead times and not have to take on a lot in the inventory.
spk03: Got it. That's very helpful. Thank you. And a question on your enterprise customers. I know you mentioned, you know, you have a lot of pilots going on and, you know, I guess the question is how quickly they're going to move to deployments. Do you have a sense from your customers that this is something that they are pretty adamant on spending on, you know, regardless of the current macro environment, or is it something that might hinge on, you know, how the macro picture shapes up?
spk02: Yeah, so good question, Jeremy. And I would say that it's the latter, that we're not seeing any slowdown in In fact, majority of the customers, they want to jump onto 5G as soon as 5G mid-band is able to cover a lot of their locations. And that's just about the only thing that has slowed things down over the last 18 months, but the large carriers or carrier partners are building that coverage very quickly. And I would say the big driver for that transformation is is that getting broadband into a lot of their distributed locations, enterprise distributed locations today, is very expensive, and it takes a lot of time, and it's, in a lot of cases, very hard for a lot of these large enterprise customers to manage, given they have to rely on dozens of different ILECs and CLECs and all that to get connectivity. Now they can go to one or two large carriers and get all of their stores covered. So this actually provides great operational efficiency and cost savings for them. So, you know, we think that that transformation will continue as the coverage improves.
spk03: Great. And one last question, I guess, you know, can you give us any update on in terms of competitive landscape, you know, what you're seeing, whether it's, you know, with your, on the enterprise fixed wireless side or on the SaaS side? Thank you.
spk02: Jeremy, just a clarification. Are you asking about the competitive landscape or which type of landscape?
spk03: Yes, sorry, the competitive landscape.
spk02: Okay, gotcha. Yeah, look, not a lot of competitors. I mean, this is an ecosystem which is kind of hard to break into because the expertise – to build these extremely complex modem solutions takes a long time to develop, and then it takes even longer to figure out how to go get them approved by all the large carriers, right? That's a big barrier to entry, and that's what we know how to do because we've been doing it for 25 years, and we've got a pretty seasoned team there. So I would say it's a very small ecosystem, and with the portfolio we've got, I don't see any competitor who can match us in terms of the strength of our FWA portfolio.
spk03: Great. Thank you very much. Thank you, Jeremy.
spk00: Again, if you have a question, please press star then one. This concludes our question and answer session. I would like to turn the conference back over to Ashish Sharma for any closing remarks.
spk02: 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.
spk00: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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