Inseego Corp.

Welcome to NSEGO Corp's third quarter 2024 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 see your conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity for Q&A. To ask a question, you may press star and then one on your telephone keypads to draw your question. you may press star and two. On the call today are Phil Brace, Executive Chairman of NSEGA's Board of Directors, and Steven Gadoff, the company's Chief Financial Officer. During this call, certain 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 the expectations, please refer to the risk factors described in the company's Form 10-K, 10-Q, other SEC filings, which are available on the company's website. Please also refer to the cautionary note regarding forward-looking statements section contained in today's press release. With that, I'd like to turn the floor over to Phil Brace, Executive Chairman of Insigo. Please go ahead.

Thank you, Operator. Good afternoon, everyone. It's a pleasure to be with you today. I'll be making some opening remarks, and then I'll be passing it over to Stephen, who will provide much of the detail. Q3 2024 was a significant quarter for Insego. We had a number of major events that, when combined, set the company on a positive trajectory for the future. In particular, the company delivered strong financial results. We completed the restructuring of our debt and right-sized our capital structure. We divested a non-core international telematics asset for $52 million. And we continue to invest in our people, the product roadmap, and channel expansion to drive opportunities in the future. Let me provide some color. First and importantly, our financial results for the quarter were ahead of our expectations. Total company revenue came in at $61.9 million, 27% growth versus the same quarter last year, and above our guidance. The outperformance was driven by strong carrier promotions for our mobile products and good execution by our sales and operations team to capitalize on the increase in demand and delivering the product. Our subscribed SaaS management platform also contributed meaningfully with good year-over-year growth in revenue and profit. Adjusted EBITDA was also significantly ahead of expectations at $9.3 million for the total company based on good cost control and strong revenue results. This delivered the highest adjusted EBITDA margin in years. Second, we substantially reduced our debt and announced the closing of that transaction today. In addition to the convert restructuring, based on the strong financial performance throughout the quarter, the company has been paying down the $20 million short-term loan and now has only a $6 million remaining balance. Once the $15 million stub of the convertibles and the $6 million short-term loan are repaid, the company will have a manageable $41 million of long-term senior debt outstanding, down from over $160 million a year ago. This represents a dramatic improvement in the company's capital structure and positions in Segal Well looking ahead to the future. Third, We signed an agreement to divest our non-core international telematics business for $52 million in cash, which we expect to close this quarter. This transaction provides increased liquidity for the company and enables us to focus on the US 5G wireless connectivity business. You will see that the financial results for this business are now required to be reported as discontinued operations in our financial statements. And fourth, Insego continues to invest in a strong product roadmap. There are a number of new and exciting growth opportunities in front of us, and we continue to focus on diversifying our revenue base with multi-carrier products for the broader channel ecosystem, in addition to expanding our business with the major U.S. carriers. This diversification of our revenue base is important to help us weather the potential volatility that comes from us being tied to major carrier promotional activity. It's also an important incremental driver of our long-term growth. Finally, as we look ahead in the current quarter, we see continued year-over-year growth in revenue and adjusted EBITDA for our continuing operations. Before I hand the call over to Stephen, I'd like to update you on our CEO search and what I see ahead for Inseego. The board, along with the leading executive search firm, have been actively engaged with a number of strong candidates, and we are encouraged with where things stand. While you can never predict exactly when this will get closed, our current expectation is we'll have someone in place by the end of Q1 2025. Insego now has a solid capital structure, a new management team, is growing, is profitable, is generating free cash flow and has a strong product roadmap, a dramatically different position than at the beginning of the year. With that, I would like to thank our stakeholders who worked collaboratively to enable the restructuring, and the NSEGO employees who have been working hard to grow the business and deliver the financial results I share with you today. I'm glad to take any questions in a few minutes. Right now, I'd like to pass the call over to Steven.

Thanks, Bill. Hey, everyone. I'd like to cover four topics with you today. I'll take you through the details of our Q3 2024 financial results. Second, I'd like to update you on the completion of our capital structure overhaul and debt reduction that just closed. Third, I'll provide an overview of the sale of our telematics business. And fourth, I'll share some color on what we're seeing in the core business and provide guidance for Q4 as we finish out the year. As Phil said, as we always do, we'll, of course, wrap up by opening the call to your questions. With that, let's start. with our Q3 2024 results. First off, please note that given the signed agreement to sell the telematics business, U.S. GAAP dictates that those operations be reported as held for sale on the balance sheet and in one net line item as discontinued operations in the P&L. As such, the Q3 2024 results present the company's revenue and expenses on a continuing operations basis, and importantly, we've laid out the apples-to-apples pro forma historical financial information for continuing operations for the prior six quarters in the earnings press release and in a new earnings deck that's on our investor relations website. This data will give you the consistent quarterly info and visibility for all of 2023 and 2024 to see the trends and relevant performance in our go-forward core business. With that, let's get into the numbers. As Phil said, Q3 was a very strong quarter. Total revenue for the company, which we'll include for this review to include both continued and discontinued operations, came in at $61.9 million, an increase of more than 27% year-over-year versus Q3 2023, and for the second consecutive quarter, delivered total revenue growth for the first time in years. The two primary growth drivers were, one, strong continued performance in the carrier mobile hotspot products from the large carrier partner MiFi promotion that we've talked about for the past few quarters, and the DROVE Q3 2024 mobile solutions revenue growth of more than 43% year over year. And two, growth in our NSEGO subscribed SaaS offering on a contract renewal that we also mentioned on the last call, that drove services and other revenue growth of 33% year over year. Rounding out product revenue, fixed wireless access, or FWA revenue, came in lower in Q3 on lower consumer-based purchases by one of our carrier customers that is being acquired by another carrier customer and subsequently reduced its purchases, and on some slower purchasing from a carrier who is managing their inventory heading into year end. Finishing up with our telematics offerings, which as I said a moment ago, we've entered into a contract to sell and is therefore reported as one net line item and discontinued operations in the P&L. The business came in at a consistent solid growth on good continued demand and execution. Moving on to gross margin, Q3 2024 gross margin percentage for total company that combines continued plus discontinued ops came in at approximately 38% compared to 33% on a non-GAAP basis in the same quarter in 2023. As we previewed on the last call, the 100 basis point lower sequential gross margin in Q3 2024 was driven in large part by the overperformance of the mobile hotspot business that had a record quarter but contributed at a lower gross margin level. Looking next at non-GAAP operating expenses, we've continued our focus on operational excellence and have successfully managed the business to both lower sequential dollar spend versus Q2 2024 and to a meaningful improvement in efficiency as a lower percentage of revenue. Sound headcount and expense management and operating efficiency efforts delivered total Q3 non-GAAP OPEX that was a favorable 3% lower sequentially over Q2 and came in at 28% of revenue on a continuing operations basis. Improved from 30% in the prior quarter and meaningfully improved from 34% in Q3 of 2023. And that is including a fully funded bonus this year. We realize OpEx efficiencies on a percentage of revenue basis in Q3 in both sales and marketing efficiencies and R&D improvements. Pulling this all together, the very strong Q3 revenue performance and focused expense management drove record Q3 2024 adjusted EBITDA dollars that came in at more than double the prior year quarter at $9.3 million on a combined continuing plus discontinued operations basis. This also enabled us to deliver a record high adjusted EBITDA margin of 15% for the quarter. Wrapping up our Q3 results with a September balance sheet, as you know, we largely completed right-sizing our capital structure, materially reducing our debt, and improving the company's outlook going forward. At the very beginning of the quarter, on July 1st, in fact, we repurchased a large $45 million position in our convertible bonds at a discount of 30%. I'll talk about this more in a moment as a material improvement to our capital structure as a subsequent event to the quarter, but we ended the September quarter with $107 million in convertible debt outstanding and a small stub of $6 million out of the original $19.5 million short-term loan that we had utilized to take advantage of the opportunity to buy in the large convertible position. Overall, working capital continues to be well-managed these past several quarters, and we continue on a trajectory of generating cash flow. The final point to make on the balance sheet is that with the capital structure improvements and convertible restructuring that's further bolstered by ongoing cash generation, we no longer have the going concern risk that became part of the company's disclosure earlier this year. With that, let's move to the second topic and look at the debt restructuring and the overall capital structure improvements that we have accomplished in the past several months. As you heard us say since we arrived at NCEGO, we've been methodical about driving a thoughtful and optimized outcome for our stockholders and restructuring the convertible notes and reducing overall debt levels. This has been a complicated, multi-step process with many considerations, constituents, and moving pieces. As you saw, we closed the restructuring of the convertible notes this past week, In total, we repurchased or converted to long-term debt and equity $147 million, or more than 91% of the outstanding notes. The total overall consideration in the exchange consisted of four elements. One, $34 million in cash. Two, $41 million in new senior secured notes due in 2029. the issuance of 2.9 million shares of common stock, and four, the issuance of 2.5 million warrants to purchase common stock at a premium to when the agreements were signed. Pro forma for these transactions, total debt has been reduced to $62 million and is heading lower. It consists of the $41 million in long-term senior notes, a small remaining stub of $15 million on the convert, and the remaining $6 million of the short-term loan that you heard me mention a few minutes ago. Further to this point, and as I'll talk more about in a moment, we anticipate the $6 million short-term loan and the $15 million convert stub to be fully repaid from a combination of balance sheet cash, free cash flow generation, and a portion of the proceeds from the telematics sale. Going forward, pro forma for the planned additional pay down of the small remaining debt balances that I just described, and for our anticipated excess cash on the balance sheet post-closing of the telematics sale, the company's net debt is expected to be approximately $25 million with an ongoing annual interest expense of approximately $3.7 million. Our pro forma capital structure provides the company with significant flexibility as we allocate capital and our free cash flow to driving growth. As a final note on the capital structure improvement, we wanted to also call out a meaningful positive for the company. We were successful in structuring the warrants that were issued in the exchanges to be cash pay. As such, upon their exercise, the company expects to receive approximately $38 million in cash, a further enhancement to our liquidity and financial flexibility. We're pleased to have executed these transactions and accomplished a meaningful reduction of debt, and right-sizing of our capital structure. Adding that strong dynamic to our profitable operations, free cash flow generation, and continuing growth, we see the company as now well-positioned and financially strong to support driving further stockholder value through growth in our new product portfolio. With that, let me share some info on the telematic sale. Our decision to divest that business was based on a combination of factors including the strategic fit within our North American-centric 5G wireless solutions business, our desire to deleverage our capital structure, and our intended streamlining of our focus and resource allocation on the strongest growth opportunities in our core product roadmap. We ran a solid process. It's a strong business and it attracted interest from multiple buyers and we're pleased with the sale price at roughly two times revenue. essentially twice the multiple that the company received for the sale of the legacy South Africa telematics business, then Sego sold back in 2021. We expect the transaction to close this quarter, and as I mentioned a few moments ago, we provided pro forma historical financial info for the core continuing operations going back six quarters to Q1 2023, so you have the full period of comparable quarterly history. With that, let's turn to the fourth discussion topic today on what we're seeing in the business in the current quarter and provide our guidance for Q4, which we want to reiterate with the telematics sale is for continuing operations only. Q4 2024 faces a tough sequential comp for two reasons. First, delivering on the heels of a record revenue and adjusted EBITDA quarter in Q3 2024, and second, the impact of the recurring annual seasonality of a lower sequential Q4 on carrier purchasing trends in the second half of December. Nonetheless, we are bullish on delivering both meaningful revenue growth and material improvements in adjusted EBITDA year over year. In product revenue, while we have reasonably good visibility on mobile broadband and a continued promotion at our largest carrier customer, an offsetting end of a promotion at a North American carrier customer and some inventory management focus in another carrier customer temper our expectations to produce another breakout quarter in mobile in Q4 like we did in Q3. On FWA, while our new channel-specific products won't hit the market until late in the first half of 2025, our investments in building pipeline overall channel program are getting some traction and we expect to be able to offset the typical seasonal decline and deliver fairly consistent FWA sequential revenue in Q4. On services and other revenue, we expect to have another solid quarter in Q4 that comes in at levels consistent with Q3 2024 on a dollar basis and meaningfully higher than the prior year in Q4 2023, thanks to the good work we've done on the NSEGO subscribe platform. And so far as gross margin, and again, on an apples-to-apples continuing operations basis, we expect Q4 2024 gross margin percentage to increase over Q3 2024 on a greater proportion of FWA and services revenue. Like our last call, we would again note that the final revenue mix between mobile broadband, FWA, and services and other will be the ultimate determinant. Q4 non-GAAP operating expense from continuing operations is expected to be relatively flat over Q3 2024. And so pulling this all together, we're providing Q4 2024 guidance for continuing operations. That is, the core ongoing business does not include the telematics operations as follows. Total revenue from continuing operations in a range of $43 million to $47 million, a growth rate of 25% year-over-year at the midpoint, and adjusted EBITDA from continuing operations in a range of $3 million to $4 million, a more than 50% growth year-over-year at the midpoint. In closing, we're happy and not surprised to see the strong growth and profitability delivered in Q3, and we're encouraged by the positive dynamics in the business that are driving continued traction as we close out 2024 and invest in new products to drive revenue growth in 2025. With that, we appreciate your time and support, and we're glad to open the call for questions. Operator?