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spk01: Hello and welcome to INSPEGO Corp's second quarter 2023 financial results conference call. Please note that today's event is being recorded. All participants today 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 to ask questions. To ask a question, you may press star then one on your touch tone zone. To withdraw from the question queue, please press star then two. On the call today are Ashish Sharma, CEO, 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 investor 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 the 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 like to turn the call over to Ashish Sharma, Chief Executive Officer. Please go ahead.
spk05: Thank you, operator. Q2 was another solid quarter for us, and I'm proud of what our teams have achieved. By all accounts, this was a very good quarter for us across the board and gives us confidence that we are on the right path. Each of our businesses performed extremely well during the quarter and you can see our continued focus on operating efficiency showing up in the financial results. In particular, we continue to see growth in our 5G FWA business with revenues up 50% sequentially over last quarter and two and a half times over Q2 2022. While we don't expect FWA to grow this quickly every quarter, it is clearly an indication that market adoption is accelerating. Overall, our 5G product portfolio, which includes both FWA and hotspots, represented over 50% of our quarterly revenues for the first time, with FWA representing roughly 33% of our overall revenues. This continued migration of our revenue mix resulted in another strong quarter from a margin perspective with gross margin of nearly 36%, which when combined with the continued focus on operating efficiency and cost controls, allowed us to deliver our second consecutive quarter of positive operating cash flow. Based on our solid first half 2023 performance, we are very optimistic about the direction of our business. As we look ahead to the second half of the year, we are laser focused on execution and continuing the momentum from the first half of this year. By execution, I mean delivering on our existing product portfolio, deployments of those products, releasing the next generation of our portfolio, and maintaining strong financial discipline. As an example, in Q2, we released our latest indoor router FX3100 that covers the newly released mid-band previously used by the DoD. We have already launched it with US Cellular and we will be launching it soon with another large carrier. Similarly, we continue to focus on growing our subscription and recurring revenue. We offer multiple cloud packages in different phases of the customer adoption cycle. And we are seeing very good progress in terms of the attach rate across the board. We expect growth will come over next several quarters as FWA customer base expands and universe of Inseego deployments continues to grow. These cloud applications are layered on the top of our 5G FWA product sale and represent step-by-step growth that we are focused on achieving. Now let me discuss our quarterly performance. As I mentioned earlier, in Q2, we delivered the second consecutive quarter of positive operating cash flow, which is very positive and something the company hasn't accomplished in a long time. While our cash flow will fluctuate quarter to quarter, I'm extremely focused on getting to a point when Sego is cash flow positive on a consistent basis. In Q2, we generated revenue of 53.6 million and adjusted EBITDA of 4.5 million. We are very proud of our first half 2023 EBITDA result of over 8.5 million. Our gross margin of 35.7% was consistent with our first quarter results and driven by significant growth in FWA revenue. We expect our gross margins to fluctuate in the mid to low 30s range based on changes in product mix in any given quarter. But clearly, we are on the right path. Last quarter, we referenced a few one-time items that improved our gross margin. We did not have much of any one-time items in Q2, so it was a much cleaner result from a margin perspective. And as I've mentioned on previous calls, we continue to focus on our controllable expenses and running Insego as efficiently as possible, which resulted in cash OPEX of close to $17 million for Q2, reflecting our commitment to getting to a point where we are cash flow positive on a sustainable basis. As it relates to demand, we are seeing a different trend that is shaped by the current macroeconomic environment and is impacting the entire industry. First, the demand for both our 5G hotspots and FWA products is solid and growing, but inconsistent in any given period. We have seen sudden increases in demand at times, which often lead customers and partners to absorb these shipments prior to placing new orders. Second, our customers and partners are keeping much less inventory compared to pre-pandemic periods. which means we and our supply chain need to react very quickly to these demand variations. Finally, this industry trend is making us leave some demand on the table in any given period as we try to build and ship products well within the lead times, even if those lead times are much shorter than the lead times we have seen over the last couple of years. This has resulted in a dynamic where we have developed backlog from quarter to quarter, something I had not seen at Insego prior to last quarter, and it has now happened two quarters in a row. Despite the variability in demand cycle, we are seeing enterprise customers accelerate their investments in 5G as they gain a greater understanding of what 5G can do for their business. Now, let me share a bit more detail about our FWA deployment progress. We are seeing deployments across both small and large companies. An increasing number of large, well-known companies have deployed 5G FWA across their nationwide footprints. Many more are assessing FWA as either a primary or backup connection with small-scale trials that we hope lead to large-scale network-wide deployments. This is a market that is in the early stages of adoption, but based on what we are seeing, is one with huge potential. As we look toward the second half of 2023, I'd like to share a few observations. First, we're expecting to see modest revenue growth in the second half of 2023 driven by our FWA business. This is primarily a function of the shift in mix from 4G to 5G products. 5G will continue to grow in the second half of the year, but largely offset by decline in our 4G business. Second, we have a significant pipeline of customers for FWA deployments. In many cases, customers are waiting for better mid-band coverage before rolling out at scale, but we have many trials underway. Third, our financial performance is much improved and reflects the strength of our strategy and the benefits from the investments we have made over the last several years. Our focus on operational discipline and excellence that we have implemented starting late last year is bearing fruit, driving improved margins and cash flow, and an increasing number of customer wins. Our cost structure has been right-sized, and we will continue to focus on running the business efficiently. This focus has allowed us to generate positive cash flow the past two quarters. We expect some volatility in cash flows quarter to quarter, but this will likely largely be around working capital and managing the supply chain and inventory needs of our customers based on the demand patterns I described above. Having said that, we expect to be cash flow positive for the full year, even with potential quarter to quarter volatility, which is a huge milestone for the company and one that we've been working hard to achieve. I'll now turn it over to Bob.
spk02: Thank you, Ashish. First, I want to extend my thanks to the entire Worldwide and Sego team for delivering another very solid quarter, delivering positive profitability and cash flow. Well done. Let me review the results of our second 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 reconciliations. Q2 revenue was $53.6 million, up 5.4% from the prior quarter. Our FWA and cloud software business comprised 65% of our total revenue and grew 42% over the prior year period. Next generation solutions, which are comprised of 5G devices and all our cloud software offerings, represented 81% of the total revenue in this quarter. Software revenue accounted for 29% of total revenue. Second quarter IoT and mobile solutions revenue was 46.4 million, up 6.5% from the last quarter. The growth was driven by an uptake of our FWA solutions. Enterprise SaaS solution revenue was 7.2 million, down 1% sequentially and up 4.5% over the prior year quarter. Consolidated gross margin was 35.7%, down 40 basis points from 36.1% in Q1, and up 602 basis points from 29.5%. Gross margin for the IoT and mobile business was 32.9%, down slightly from 33.4% in the prior quarter, and up from 27% in the prior year period. As Ashish alluded to in his comments, The meaningful improvement in gross margin on a year-to-year basis was attributable to a significantly higher mix of FWA revenue. Gross margin for the enterprise SaaS segment was 54.1%, up from 52.7% in Q1, and up from 49.4% in Q2 of 2022. Q2 non-GAAP net loss was $2 million, or a negative 2 cents per share, compared with a loss of 3 cents per share in the prior quarter and a loss of 4 cents per share in the year-ago quarter. We reported an adjusted EBITDA gain of $4.5 million, which was up from a gain of $4.1 million in Q1 and higher than the $1 million EBITDA loss in the year-ago period. For additional details on our non-GAAP and adjusted EBITDA results, please refer to our reconciliation tables in our press release. Cash, cash equivalents, and restricted cash at the end of Q1 was $15.2 million. This cash balance was up from our cash balance of $8.7 million in the prior quarter. With that, let me turn it back to Ashish for his closing comments.
spk05: Thanks, Bob. To summarize, Our ability to transform Inseego into a FWA solution company was demonstrated by our first half results. There remains a huge growth opportunity across many of these enterprise customer segments enabled by our portfolio of 5G hardware and software. As 5G mid-band coverage continues to scale, the breadth of our portfolio gives me confidence in our ability to capture the many opportunities ahead.
spk01: We will now begin our question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. The first question is from Scott Thirrell of Roth Capital Partners. Please go ahead.
spk00: Hey, good afternoon. Thanks for taking the questions. You guys, nice job on the quarter. Hey, Ashish, maybe to quickly follow up, I want to make sure I heard some numbers correctly. I thought you said that the 5G FWA solution was 33% of the mix. Wanted to confirm that. Also, I'm not sure if I heard a mixed number between 4G and 5G. I'd love to get the update on that front. And is there a comparable software number? I think you said it was 29% of the mix in the current quarter. Is there a comparable number that you had for the first quarter or the year ago period? And then I had a couple of follow-ups.
spk05: Hey, Scott. Hope you're doing well. Yeah, let me give you those numbers. I'll start with the last one first. So the software revenue was in the 28%, 29% range of the overall revenue. And I'd say about 5G was over 50%, so close to like 52%. And 4G overall was close to 19%, 20% of the overall revenue. Great. Very helpful. And then...
spk00: You know, Bob, maybe for you on the OpEx front, you guys have tightened things up a little bit. R&D was up this quarter. Wondering if there's anything to read into that and how we should be thinking about OpEx going forward if there's some further tightening or these are the levels we should be thinking about.
spk02: Yeah, let me start. Thanks, Scott. Good questions. Let me start with your second question. I would view OpEx as flat to slightly down. as we go forward. So think in that way. And regarding your R&D question, actually cash R&D was flat and will remain flat to slightly down. I think what you saw on a book basis is just limited to kind of how we amortize software with the mix of our various products. So that's what drove the book look that way.
spk00: Great. And then maybe she's just from a high level looking at the opportunity in the pipeline for 5G FWA. I'm wondering if you could give us some metrics to kind of put around it. You know, it's taken some time in terms of building out the mid-band coverage. It feels like we're a lot closer, and you're starting to build up those pilots and that opportunity. I was wondering if there's some either soft metrics or harder metrics you could give us in terms of the pipeline, how big it is, the number of customers, maybe potentially the number of addressable devices that are under discussion. And going forward, what is the sales cycle looking like? Is it starting to compress? And when do you really think that we start to see the inflection? Does it happen later this year? We wait until 2024. Thanks.
spk05: Yes, Scott. So what I would say is the market buildup would be gradual, as I mentioned before. And the main reason really is that, you know, there are a number of different factors that every enterprise or SMB customer looks at. The offering itself is really good. Like, you know, the pipeline of interest from customers, we have thousands of customers, SMB and enterprise customers, who have filed the product, filed the 5G network, and they love it, but they all have different operational needs workflows, right, that they're trying to put on 5G and kind of segregate that away from the other broadband connections they have, right? So the decision-making, the decision process is very different from, you know, what we saw from our hotspot business in the past. And so it's a gradual step-by-step build, lots of interest. Pipeline continues to be super healthy from big Fortune, you know, 100, 500 companies to lots and lots of SMBs. And I would say, like, you know, the deployment cycle really depends on your use case, right? I mean, where you have a use case of a remote worker, I mean, that sales cycle is quite small. I mean, that could take just a matter of a few weeks for the customer to try the product and then start handing it out to, you know, to their workforce, remote workforce, to, you know, bigger use cases where... our outdoor product is going on connecting, like, thousands of, you know, locations, distributed locations, store locations for the customer, and then kind of integrating the 5G WAN as part of their broader network that's in place, you know, the existing LAN and the existing LAN infrastructure. So those deployments, you know, take a little bit of time. Like, they take, you know, give you an example. Like, you have a large, you know, customer network who trial the product maybe 12 to 18 months ago, and they trial for a few months, they love the product, and it's taken them like eight to 10 months now to roll it out to multiple thousand locations for the product. So in that case, it took time, but overall, the size of the business with each one of these enterprises is really good.
spk00: Great, and maybe the last one, if I could. you know, just in terms of the channel for 5G fixed wireless access, you've got relationships with multiple carriers. I'm wondering if there's anything that's particularly productive, either from a carrier standpoint or other channel, VAR or otherwise, that you're seeing a lot of productivity. Thanks.
spk05: Yeah, I mean, we have multiple routes to market, as you mentioned, Scott. You know, we have the traditional DSTI and VAR channel. We have multiple programs with different carriers. And I would say the initial push was, we're getting a lot of assistance from the carriers. I mean, they're obviously super motivated to sell a lot of 5G vans to enterprises, and they love our solutions. And that's where I would say that we're seeing the biggest success, either through the stock program we have with them or through multiple other co-sell programs we have with the carriers.
spk00: Great. Thanks. I'll get back in the queue.
spk05: Thanks, Scott.
spk01: The next question is from Lance Vitanza of Cowan & Company. Please go ahead.
spk03: Hi. Thanks, guys. Congratulations on the quarter. A couple questions here. First, so tell me if this makes sense. So you've got a fixed wireless access and cloud business. It looks like it's at about $145 million revenue run rate, and it's growing at 40% year-on-year. So I'm just wondering, is it possible to talk about, I guess, three things? One, how long do you see – how long do you think you can maintain that type of growth, or what does the growth plane look like over the next couple of years? Two, what is the fixed cost base necessary to support that growing revenue stream? And then – and finally, you know, what are the incremental margins? I mean, should we think about it? Is it a 35% sort of – flow through once you've covered your fixed costs, or is it considerably higher, or is it lower than that, et cetera? I mean, I think those questions would really help us triangulate on how to value this growing business. Thanks.
spk05: Hey, Lance. Good question. So let me try to break that down, right? So maybe I'll talk about first in the short term, right? I would say in the short term, the way you look at things is it's step-by-step incremental improvements, right? I mean, I would not say that we could see this type of FWA growth every quarter. I mean, it would be, you know, early in developing a new market, you see these, you know, up and down jumps. So we'll see that. But in the next longer term, right, you know, four to six quarters, whatever you have it, that should settle down. And I would say the market is, the market opportunity itself is huge. So we're just only seeing a sliver of the market right now, and hence the variability in the business and the order flow. Software business is a lot more stable. It grows at a slower pace, but the way we have tied it up now with our 5G business is when FWA grows, so will our software business will grow. So I would say that in the long term, definitely you're looking at very high growth rates year over year, double digits, higher growth rates. How within the shorter lifespan of quarter to quarter, how that movie plays out, it's going to be step by step, if that makes sense. And then your last question about margins, I would just say we're just getting started. We've got We've got, you know, more growth on FWA coming. We've got multiple cloud packages that, you know, that are very early in the adoption cycle. So as those things kick in, I mean, I definitely see that the overall gross margin target of over 40% is definitely very achievable.
spk03: Okay, that's actually really helpful. Next bunch of questions on free cash flow, where you did a nice job there. You generated some free cash flow. We were expecting you to burn some cash on a comparable kind of EBITDA number, so that was good. I'm just trying to understand the variance. It looks like your CapEx was pretty close to what we'd expected, so you know, that, that doesn't explain it, but, um, can you, is it possible for Bob, maybe could you walk us just from EBITDA to free cash flow? Four and a half million of EBITDA, 3 million, I'm calculating a sort of levered free cash flow. Um, I'm guessing you had a, an inflow from working capital, working capital generated some cash. Is that, is that accurate?
spk02: Our, our working capital did moderate, um, in a positive direction from a cash standpoint. And, um, I'm just digging out a couple of other things. The other things we had working for us is basically we, I should say, and again, against our expectation, we also, again, skinning down CapEx. We think we're in a good spot. We had a positive effect from working capital, as you mentioned. And then Lastly, and you probably saw this from the balance sheet, we also worked on inventory levels as we've been kind of aiming to do over the last two or three quarters. We're not, you know, just from a forward expectation standpoint, we're not saying we could do that indefinitely, but we did skinny it down quite a bit versus prior year. That's the big movement.
spk03: Okay. And then I did see something – below sort of the cash flow line. It looks like you raised $5.5 million in the quarter from a public offering, and I'm wondering if you could provide more detail on that transaction or if I'm misreading that.
spk02: No, no, good, Lance. Yeah, the other thing that was a contributor, kind of a non-operational contributor, more of a financing, is we still had open capacity in the ATMs. facility that was in place for the last couple of years. And in working with our board, one of the things we wanted to achieve was just maximum liquidity and flexibility. So we did execute against that, and that's where we raised about $5.4 million.
spk03: Great. Thanks very much. That does it for me.
spk02: Okay. Thank you, Vince. Thanks, Vince.
spk01: The next question is from Tor Sandberg of Stifel. Please go ahead.
spk04: Yes, good afternoon. This is Jeremy on for Tori. I guess, yeah, just let me offer my congratulations on the solid free cash flow performance as well. And just a quick follow-up on that last question. The ATM, is that complete now? Are there plans to continue raising capital? Or is this, you know, this $15 million sufficient in the near to medium term?
spk02: Right now, I think the best way to handle it is we're not active in the market right now, so that's first. And we'll reserve to see if we have any new financing. But we have correctly sized the company. In fact, we've taken some additional cost reduction actions that are not yet in the financials, but they will accrue positively to the latter part of this year. So we think we're very, very well positioned from a cost stack standpoint.
spk04: And just on those cost reductions in the latter part of the year, is there a way to quantify that for us? How should we think about that? I know you did say for the next quarter we should think about being down a little bit sequentially, but how about in Q4?
spk05: Hey, Jeremy. So what I would say is the $17 million cash OPEX we have right now, as Bob mentioned earlier, I think you can take that and slightly moderate that down later in the year. And that right there is about over a $40 million cost that we've taken out of the company going back to last four quarters or so.
spk04: Got it, thank you. And then maybe switching to the backlog commentary, Ashish, that you provided, you said it was up sequentially the second quarter in a row. Can you help quantify that for us? And then, you know, when you talk about, you know, having so many orders that you're leaving some on the table, are these basically getting pushed out into future quarters and being added to backlog? Just help us to understand kind of your visibility. Thank you.
spk05: Yeah, good question, Jeremy. Yeah, I mean, those orders, you know, that we can't fulfill get pushed out to the next quarter. For this quarter, like, look, we just finished the first month of the quarter, and we're in really good shape in terms of our target revenue for this quarter, and it's all on supply chain now, right? So we're driving, you know, our CMs really hard to fulfill that, those orders that we've got. So, you know, bulk of the... revenue demand for this quarter, we already have orders for you.
spk04: Got it. And sorry if I missed it, but did you provide, you know, expectations for this quarter? You said you had the bulk of the demand already in place.
spk05: Yeah, I mean, look, you know, we're not providing exactly like the dollar number for the orders we have. I would just say like it's, you know, it's coming from multiple different customers. Um, and, and we're just, you know, we're, um, they've unloaded everything. We have an inventory for those specific products and we're now quickly trying to refill that inventory so we can ship the products to the customers.
spk04: Got it. Um, and then last question before I jump back in the queue, but on the, on the inventory side, um, it sounds like, you know, it's lower than you'd like. Um, and you're trying to refill that inventory. Can you give us, you know, what kind of targets you might have internally and if you have any commentary in terms of, you know, channel inventory, whether at your, you know, the bars or carriers?
spk05: Yeah, I mean, look, not a lot of inventory at the channel and at the carriers right now. And I'm not anticipating building up a lot more inventory. I think we're, you know, we're going to just, you know, run, you know, pretty moderate to what we have right now. And again, the whole reason we don't want to bulk up a lot of inventory is just the demand cycles, the variability of the demand cycles, you know, within the quarters are still with the macro, they're still up and down. And so we just, you know, we're trying to be very cautious on trying to maximize the demand that we have with our customers and yet not load up the inventory as we had last year.
spk04: Great. Thank you very much.
spk05: Thank you, Jeremy.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Ashish Sharma for any closing remarks.
spk05: 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.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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