Inseego Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 6 speakers on the call.

Operator

Hello, and welcome to Inseego Corp. Third Quarter 2023 Financial Results Conference Call. Please note that today's event is being recorded. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions.

Operator

On the call today are Ashish Sharma, CEO Stephen Gatos, Chief Financial Officer. 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 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.

Operator

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 Forms 10 ks, 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 now like to turn the call over to Ashish Sharma, CEO. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone. Thanks for joining us today. Q3 was a mixed quarter for us. We continue to see the effects of our supply chain challenges in addition to legacy product declines, which impacted our revenue in Q3 and will extend into Q4.

Speaker 1

As you will see in our results, we are managing our operations tightly. We will continue to be laser focused on profitability and cash, while continuing to invest in areas that will drive growth. During the past several weeks, we made 3 meaningful additions to the Inseego team. Bill Brace joined our Board of Directors and brings a terrific background as a seasoned CEO and wireless industry expert. Steven Gaidoff joined as a CFO and brings a terrific profile and skill set of driving growth and managing operations.

Speaker 1

And Steve Harmon joined this week in our newly created role of Chief Revenue Officer. I'm excited about the incremental leadership around the table and With that, I'd like to cover 3 topics with you today on the call. First, I'll give a quick summary of our Q3 business results. 2nd, I'd like to provide an update on the progress of our transformation First, let's talk about our Q3 results. We reported Q3 revenue of $48,600,000 and adjusted EBITDA of 4,000,000 The results were below our expectations, mainly due to supply chain challenges that impacted several large customers and the run off of legacy 4 gs product revenues.

Speaker 1

This quarter demand was better than expected for our new 5 gs products and worse than expected for our legacy products. Earlier in the year, we moved to a build to order model to be disciplined with our cash And the downside of this model is limited ability to respond to increases in demand that are shorter than our lead time. Given the underestimated the demand for our new 5 gs products, we could not fulfill several $1,000,000 of sales. While we missed the perishable demand, a positive note is that we came back and delivered the product in the second half of the quarter to realize some of the missed revenue opportunity. Because we were late to respond to the demand, we shipped more at the end of the quarter, which will be consumed in Q4 suppressing our results as customers digest that inventory.

Speaker 1

In summary, the demand for both our 5 gs hotspots As well as 5 gs FWA products was good this quarter, but due to supply chain challenges and a delayed FWA launch with a large customer, We couldn't hit our targets this quarter. For my second discussion topic, I'd like to update you on our progress Towards migrating to become a full solution FWA company, both in terms of the market and our product portfolio. Today, Inseego has a comprehensive portfolio of 5 gs hotspots, 5 gs FWA and cloud solutions That enables several types of deployment use cases including mobile, indoor and outdoor scenarios. As 5 gs networks have evolved over last couple of years With a lot more network capacity driven by new mid band spectrum investments by the carriers, there is a new FWA market evolving for enterprises To adopt 5 gs as a primary broadband solution for distributed locations and on the go use cases. While we have seen good traction with early customers, the market is taking time to develop mainly due to carriers' network coverage on the new spectrum.

Speaker 1

The most pronounced aspect of this dynamic is the anticipated but rapid decline in legacy 4 gs and hotspot revenue. To address the challenge of growing our new 5 gs FWA products and disruptive revenue streams against the backdrop of this Legacy Technology revenue streams, we have been working through a focused 2 part plan for multiple quarters and we have made good progress. First, we wanted to make sure our cost structure was sized appropriately And so we worked diligently over the last 18 months to significantly reduce our spend. We've removed over $50,000,000 of Annual run rate cost from the company. Our goal is to continue operating with increasing levels of efficiency with a cost structure That will enable us to stay profitable as measured by adjusted EBITDA and generate free cash flow.

Speaker 1

We are going to build on this progress by driving profitable growth with 5 gs FWA. I'm very happy to have Stephen join the team as our new CFO to help drive our profitability and growth profile as we manage the transition. The second component of our transition plan It's to maximize initial customer opportunities for 5 gs FWA, so we can stay ahead in the market. To accomplish this, we aligned ourselves with the leading carriers who are driving the initial 5 gs FWA market. We are able to leverage our long standing As the enterprise FWA market is expanding, we are looking to strengthen our go to market approach so we can create scale.

Speaker 1

To that end, I'm very happy to have Steve Harmon join our team as the new CRO to drive a Strategic change in our go to market and growth profile. He comes from a great sales and marketing background, most recently as a Global Head of Sales at Sierra Wireless and has helped companies ramp up sales in major markets. I'm looking forward to partnering with him to significantly evolve our go to market efforts So we can accelerate our business, especially in enterprise. As a final thought on our evolution to a full stack 5 gs F2B provider, I'd like to share some positive news of what we are seeing in terms of early customer engagements and some of the deliverables of the business. Our 5 gs FWA customer base continues to build nicely within several enterprise and SMB market segments.

Speaker 1

We have onboarded over 56,000 new enterprise and SMB customers over the last four quarters on our primary 5 gs WAN solutions. The majority of these customers are also using our cloud to manage the 5 gs connections, which is part of our strategy and provides a high margin, high growth revenue stream to our portfolio. Some examples of the latest deployments include real estate companies, Nationwide retailers, U. S. Government agencies and insurance companies utilizing our indoor and outdoor FWA solutions To connect their distributed sites and employees, to reduce costs and enhance productivity.

Speaker 1

We believe the market will continue to build as more and more Network coverage and capacity comes online. However, until these early customer engagements turn into large deployments, The revenue being generated from these customers will be modest. With that, I'd like to move on to my 3rd topic on the call today and provide some insights on Q4 And some of the challenges that we are facing. We are seeing bullish signs on 5 gs FWA customer engagement, But in the near term, we are facing some headwinds in Q4 revenue driven by the following three factors. 1st, The 4 gs hotspot revenue is declining meaningfully in Q4.

Speaker 1

We knew this was going to happen for quite some time now And we've been working hard to backfill it with 5 gs revenue. However, the 5 gs revenue, while strong, hasn't been able to fully cover the 2nd, there was a delay in launching a new 5 gs FPGA product with a large customer in Q3, resulting in later revenue ramp than we expected. The delay is caused by new customer requirements that came in very late as we prepare for the launch. The product was soft launched a couple of weeks ago after we got through the Apple iPhone frozen launch window of latter part of September. So while this impacts our sales in Q4, we feel confident we will be back on track in Q1 in terms of our 5 gs revenue as the initial feedback from the customers on the new product is quite positive.

Speaker 1

The 3rd friction point on Q4 is that due to shipments in late Q3, Some large customers are starting Q4 with higher inventories that need to be sold before they will reorder. So with these challenges, Q4 looks to be meaningfully below our expectations. This is obviously disappointing, But we continue to be responsive and have taken additional cost reduction actions this past month to ensure we keep the company profitable While the business comes back up by early next year, Stephen will provide some more insights on this in a moment. Despite these near term challenges, I'm optimistic about the growth of our 5 gs FWA Solutions business, which we believe is still in the infancy. We have signed up a lot of enterprise and SMB customers over last 4 quarters On our 5 gs FWA and cloud platforms, we have gone through a lot of learning with our carrier customers to get 5 gs FWA prepared

Speaker 2

Thanks, Ashish. Good afternoon, everyone. I'd like to cover 4 things with you today. I'd like to start by sharing a brief perspective My positive view of the opportunity here at Inseego and what I'm focused on to help ensure that we capitalize on it. I'll then cover 3 core aspects of the business.

Speaker 2

First, the financial details and insights on our Q3 results. 2nd, share with you what we're doing right now to protect shareholder value. And 3rd, provide guidance on Q4. As the operator noted, we'll of course wrap up by opening the call to your questions. First off, I'm really glad to have joined Ashish and the team here at Inseego.

Speaker 2

After 6 weeks or so on the job, I'm bullish on the opportunity that sits in front of us. I see a clear path and the ability to help make an impact in monetizing it. Inseego has a very strong technology prowess and unique product related capabilities. Rob already seen industry leaders seek out our engineering input and advice. This is one of the assets that uniquely positions Inseego to penetrate a $50,000,000,000 TAM that's starting to unfold and that should translate into meaningful stockholder value.

Speaker 2

As we move forward to execute on this, I'm focusing my time and efforts on 3 areas across the company. 1, our overall capital structure management In addressing our near term stock price level and the reverse stock split, working through our convert overhang and evaluating our portfolio of businesses. 2nd, I'm focused on our business strategy and driving our profitable growth profile and roadmap from our Q4 execution to our 2024 and intermediate term plan. And 3rd, I'm focused on our operational execution and driving the metrics and performance management construct I'm particularly looking forward to working with Steve Harmon and having him as a strong partner to now drive the evolution of our sales execution. It's a metrics and inspection cadence that we're fiercely focusing on together as we look to drive improvements in our FWA ramp and that I think will make a big difference going forward.

Speaker 2

With that, let's look at Q3 results. Q3 total revenue came in at 48.6 with 2 thirds of the year over year decline from 2022 being driven by the legacy 4 gs runoff. While there were some positive dynamics on the top line with our 5 gs products increasing to 54% of total revenue in the quarter And 5 gs FWA growing 29% year over year, Q3 was a challenging quarter for the bulk of our revenue portfolio. This generated the most revenue in Q3 since its inception nearly 2 years ago. Unfortunately, It was just not enough to offset the supply chain and inventory issues and the impact of the declines in 4 gs.

Speaker 2

Beyond the core mobile hotspot and FWA business, our telematics business delivered steady revenue growth and gross margin in Q3, up 11% year over year and coming in at a non GAAP gross margin of 46% on an organic basis respectively. Our mobile solutions software revenue was down modestly in Q3 as one of our carrier partners had a customer loss that reduced the number of subscriptions for us. This had a small revenue effect, but a larger impact on gross margin that I'll get to in a moment. Our Our channel business unfortunately continued at a tepid level in Q3 and has not scaled this year. As Ashish discussed, This intended growth driver will benefit meaningfully from a rebalancing of resources and from Steve Harman's leadership.

Speaker 2

We believe our VAR business should be multiples of what it is now from a revenue perspective and in relatively short order. Moving on to gross margin. In prior earnings calls, we've highlighted that gross margin percentage may move around from quarter to quarter, But that the low to mid 30 percent area on a non GAAP basis should be the new higher baseline in 2023 versus 2022. The trajectory is expected to be higher longer term. For Q3, while there was a decline sequentially from the mid-30s in the first half of the year Due to Q3 product mix, the Q3 33 percent non GAAP gross margin was a respectable Improvement from the prior year's 26%.

Speaker 2

At a macro level, as a result of the reduced low margin 4 gs revenue, We see non GAAP gross margin percentage lifting again in the current Q4 quarter. Spending a moment on GAAP gross margin, we wanted to talk to the large inventory reserve that we booked in Q3. In total, we recorded a $14,900,000 reserve in Q3 as a result of updated estimates and sales forecast for some of the older products in our portfolio and related to the Q4 2023 end of life of our 4 gs mobile hotspot product by our largest carrier customer. The reserve was based on a combination of the carrying values of the inventories and capitalized costs On finished goods, raw materials on hand and materials at our contract manufacturer partners, The dollar amounts of these elements are discussed in our 10 Q that's being filed tonight and these charges are excluded from the calculation of Q3 adjusted EBITDA. As we continue to manage revenue dynamics of the business, we're also taking a disciplined approach to managing our spend.

Speaker 2

With that perspective, looking at our Q3 non GAAP operating expenses, total spend dollar amount in more than 2 years. The actions that the company took in the 1st part of 2023 drove lower aggregate and relative spend across all cost areas in Q3 from COGS to sales and marketing to R and D. That helped us deliver another quarter of Positive adjusted EBITDA coming in at $4,000,000 With that, I'd like to move on to my second topic today And so far as what we're doing now to protect stockholder value. As we're addressing our go to market and growth needs, We're continuing to take costs out of the business to make sure we head into 2024 from a position of strength so that we continue delivering profitability in the form of adjusted EBITDA and free cash flow. In addition to the previous cost structure actions that the company made in 2022 And the 1st part of 2023, in the last 30 days, we further reduced spend and have further aligned investments with near term customer focus and revenue generation.

Speaker 2

You'll see this going forward across the board, but predominantly And improved efficiencies in R and D spend where we have a strong team and production capability and we were able to trim a combination of outside program and internal costs. In total, we just removed about $2,000,000 of quarterly spend. While this will be only marginally helpful in the current Q4 given the timing of the implementation, it will very much shore up our profitability and cash generation profile going into 2024. With that, let's turn to our 3rd topic and so far as the current path in Q4 that is presenting some financial challenges. As we've talked about today, one of our largest carrier customers transitioned off buying 4 gs mobile hotspots effective this quarter and so that product line is now essentially end of life.

Speaker 2

While we know have known about the legacy 4 gs decline and have been planning around it, our new 5 gs FWA product revenue Has been growing nicely the past few quarters, but it's just not large enough dollars yet to offset the legacy 4 gs decline in aggregate. This is seen squarely in the mobile hotspot portfolio where our revenue in the not so distant past was in excess of $40,000,000 per quarter. It is now a fraction of that in Q4. And so considering all this, Q4 looks to be meaningfully below our internal expectations. As such and wanting to drive transparency with our investors around what we're seeing, we'd like to provide some guidance for the current Q4.

Speaker 2

Starting with the top line, Q4 2023 total revenue is anticipated to be in the range of $40,000,000 to $42,000,000 With this being the Q1 of no 4 gs hotspot revenue and managing through inventory restocking issues. For Q4 2023 adjusted EBITDA, we see our recent cost savings initiative helping alleviate some of the revenue pressure so that we can maintain profitability, albeit in the $1,500,000 to $2,000,000 range for the quarter. In closing, we're focused on addressing our go to market execution performance quickly and effectively as we plan for 2024. We're oriented around driving the business and managing our spend responsibly to deliver profitability and we continue to have confidence and monetizing the 5 gs opportunity in front of us. With that, we appreciate your time and support and we're glad to open the call for any questions.

Speaker 2

Operator?

Operator

We will now begin the question and answer session. The first question today comes from Lance Vitanza with Cowen. Please go ahead.

Speaker 3

Thank you. Thanks, gentlemen. Let me start with, I guess, I just want to try to understand a couple of things, Stephen, that I think you said. Did you Say that you expect 0 4 gs hotspot revenue in the 4th quarter?

Speaker 2

Very de minimis amount.

Speaker 3

Or de minimis amount, Yes. It's been nice enough. Okay. So then I guess the runoff that's been ongoing, Does that suggest then that that's we've come to an end or is there was there sort of like a glitch and then maybe we get a couple more quarters in 2024 of additional 4 gs Hotspot Contribution.

Speaker 4

No, Lance. This is it. This is it for the 4 gs Hotspot.

Speaker 3

Okay. Okay. Okay. Well, okay. So then we can just focus on the 5 gs business.

Speaker 3

So, I guess the question there is, And I don't know, Stephen, if you I know you've only been there 6 weeks, so I get it. But do you have a sense yet for really kind of like what The fixed costs are associated with the 5 gs kind of platform. And then as you get beyond Those fixed costs, what kind of variable cost contribution margin from the incremental revenues do you expect? I'm just trying to get a sense for the Kind of economic proposition as we look ahead?

Speaker 2

Yes, it's a great question and it is, one of the exact things That we've been spending time on and I have as I've been on boarding. The good news is that the crux of what you're saying should pan out. In other words, There is a decent amount of variable costs and controllable costs that we have in that part of the business. So that for example, When we were facing revenue pressure now, we can reduce spend fairly immediately. So there's Labor costs that are variable, there's outside contractor and programmatic costs that we have, such that We can control the near term profitability of that product, A.

Speaker 2

And B, to your second point, From a long term perspective, it should be more of a step function in cost structure, so that as you start to scale out And grow revenues more exponentially, you'll see a steeper curve in revenue than you will in cost structure, so you should get an expansion in profitability.

Speaker 3

And then I guess for Ashish thank you, Steven. And I guess for Ashish, did the delays one of the things that we routinely hear is that The product technology is very high and very good. But I guess, did the product delays that you To discuss the unfortunate as they are, do they sort of create a situation where your customers are Are you kind of forced to make other plans or how does that sort of, I guess just from a competitive standpoint, how stable What would you see and what kind of relationships, how would you describe the level of the relationships you have with some of your key customers?

Speaker 4

Yes, good question, Lance. So I would say that our product is really preferred and the slots we are in. During this quarter, I would say we are facing 2 different dynamics. 1 was the inability to supply The product due to supply chain challenges because the demand went up very quickly in late June, so we couldn't supply lot of product in the first half of the quarter. And then we shipped a lot of product between from mid to late in the quarter and that's creating some headwinds For the next quarter, which is Q4, so that's one dynamic.

Speaker 4

There's some perishable demand there because especially on hotspots, When we could ship the product, I mean there are other products that the customers have. The second dynamic is the delayed launch with one customer And that again is impacting Q4 and that got delayed because some new requirements came in at the Eleventh Hour. We're working through diligently with the customer and in fact we have soft launched it. I mean the initial feedback from the end customers is very positive. So I would say to sum it up, we are the preferred product in the slots we are in, but like the demand is very stable.

Speaker 3

But I guess then really what I'm trying to get at is it doesn't sound like you are losing market share As a result of this, it sounds like some of the delays are actually driven by the customers and then the other ones, the customers are They are hanging with you. They're not saying like, oh, you're 3 weeks late, so we're going to another supplier.

Speaker 2

That's correct.

Speaker 3

Okay. And then just maybe my last question before I I'll hand over the baton here, but just to touch on the balance sheet and I don't know if the 10Q is out yet, but I'm wondering, I guess, a couple of things. Number 1, will there be any sort of warning Around possible liquidity shortfalls over the coming 12 months, either in the liquidity section of the MD and A or do we And then just sort of thinking about the debt obligations, the ABL, it doesn't expire Next December, but that does mean that you'll have to start recording the balances as current liabilities early next year unless To extend that maturity, I'm wondering if you have a prognosis for that. And then I know you mentioned this briefly, Stephen, but then the converts obviously mature Until spring when presumably the momentum the operating momentum is a little bit better or how should we think about that? Thanks.

Speaker 2

Yes, really good questions and we're glad you asked because it's obviously meaningfully important and material to equity value. So thank you. The short answer on your last question is we are not waiting until spring to manage the situation. We are on the convert. And it's a group with whom we're engaged, and we're actively looking to manage that through.

Speaker 2

So we are not waiting. We're taking care of that now. And it is an important aspect of the cap structure. To your earlier points, which are really good around liquidity And the short term facility, we I guess the nutshell is we have ample capacity, so we do not feel constraint on our ability to borrow, it really is a true working capital facility. We have very large carrier customers that Sometimes they pay really awesome like they did this quarter.

Speaker 2

We have lots of cash. Sometimes they take longer. And so that's where that Working capital facility comes in place really well. I think our review is that that facility is not really an issue for the company Either short term or longer term, the bigger not to focus on is the convert, which we are focused on and we are not waiting

Operator

The next question comes from Tore Svanberg from Stifel.

Speaker 5

This is Jeremy calling for Tori. I guess The first question, just digging in a little bit more deeply into the delay on the fixed wireless asset side. The new requirements for the product, are there is there any indication that it's a change in strategy On behalf of the Carrier, whether to the upside to the maybe the smaller or larger potential SAM for you guys, Are there any just trying to get a clear picture into any shift in possible SAM because of this delay?

Speaker 4

Yes, Jeremy, no, it's not the case. I mean, it's a very specific requirement as it relates to the network of this particular customer. So it's very pointed in that fashion. It doesn't really

Speaker 5

Great. And I guess maybe moving To the financials, I know you mentioned non GAAP push margins of 33%, but So this is the inventory adjustment that you mentioned in the $1,000,000 write off of inventory order fees. So if we take that out, we get the 33% non GAAP. Is there any reason why this isn't this won't show up in the non GAAP Net income, because it looks like these costs are excluded from they're not Added back, I guess, when you show the non GAAP net income?

Speaker 2

Yes, we made a point of pulling it out of EBITDA for that purpose. And as you said, it will come out of the COGS line specifically the Mobile Solutions To get to the 34.6, and that's how we recorded it.

Speaker 5

Got it. Okay. And is there going to be any, I guess, impact going forward from these charges? Or is there a potential

Speaker 2

I couldn't hear the first part. Is there any benefit on board? Is that what was the

Speaker 5

Sorry, on the back end, I guess, If you can take a charge now, is there some chance that some of this could be recovered?

Speaker 2

Yes, absolutely. I mean the charge is a P and L charge is not a disposition of inventory, it's not a disruption of inventory. It's just based on How much inventory and raw materials we have today and what we sold in the last 12 months and what the sales forecast is now going forward. And so you say, okay, it looks like We will not be guilty clear that amount, so you take a reserve. And to your good point, if something happens and there's a bluebird or things break really well Positively, then we'll see some upside.

Speaker 2

But we're obviously not planning on making things with a bluebird or upside and that's Essentially why there's a reserve.

Speaker 5

Got it. Great. And maybe 2 more quick questions. One would be on the $2,000,000 OpEx That's coming out. Can we see that fully realized then in Q1 of next year?

Speaker 5

And maybe would it be fair to say something like Just a fraction of that in Q4?

Speaker 2

Yes, that's exactly right. A part of it will be in Q4 just based on the fact that it's Early November and then the full benefit in Q1, spot on.

Speaker 5

Got it. And the last question would be on just Looking at the your working capital went down quite a bit, which is nice on the cash flow side. I was surprised to see accounts receivable drop $8,000,000 And how many reconcile that with late shipments in the quarter? Were you able to collect really quickly on those shipments? Is that kind of what happened there?

Speaker 2

That's exactly what happened. We as we said before, on the other side of the table, we have large carrier Customers that we sell to and through and this quarter we had 1 or 2 that paid very quickly on a lot of stuff. And so our DSOs improved tremendously. We had very large cash collections. Awesome, right, we'd much rather have cash earlier.

Speaker 2

It's A nice dynamic to have, but it's obviously not.

Speaker 4

It's a

Speaker 2

bit of an anomaly to have that improvement in a short period of time. And so you see a huge pop in cash.

Speaker 5

Got it. And sorry, one last question, if I could squeeze it in. Do you have Breakeven targets whether for adjusted EBITDA or on a free cash flow basis?

Speaker 2

Well, our commitment and our focus is on maintaining profitability in the form of adjusted EBITDA. So that's an important metric For us to be EBITDA, just EBITDA positive, we're also focused on the cash burn and particularly as we exit this quarter and head into next year of generating free cash flow. So that's a target for us as we plan out and Set ourselves up for Q1.

Speaker 5

Very good. Thank you very much.

Speaker 2

Yes, Rana. Good questions. Thank you. Thank you, Jamie.

Operator

This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.

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