Inseego Corp.

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.

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.

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.