Inseego Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 2, 2023

There are 7 speakers on the call.

Operator

And welcome to Enseego 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. After today's presentation, there will be an opportunity to ask questions. On the call today are Ashish Sharma, CEO Bob Barbieri, Chief Financial Officer and other members of the management team.

Operator

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. These forward looking statements are not historical facts, but rather are based on the company's current expectations and beliefs.

Operator

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 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 like to turn the call over to Ashish Sharma, Chief Executive Officer. Please go ahead.

Speaker 1

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 5 gs FWA business with revenues up 50% sequentially over last quarter and 2.5 times over Q2, 2022.

Speaker 1

While we don't expect FWA to grow this quickly every quarter, it is clearly an indication that market adoption is accelerating. Overall, our 5 gs 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 2nd consecutive quarter of positive operating cash flow. Based on our solid first half twenty twenty three 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.

Speaker 1

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 U. S. Cellular and we will be launching it soon with another large carrier.

Speaker 1

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 5 gs FWA product sale and represent step by step growth that we are focused on achieving. Now let me discuss our quarterly performance.

Speaker 1

As I mentioned earlier, In Q2, we delivered the 2nd consecutive quarter of positive operating cash flow, which is very positive and something the company has accomplished in a long time. While our cash flow will fluctuate quarter to quarter, I'm extremely focused on getting to a point Inseego is cash flow positive on a consistent basis. In Q2, we generated revenue of $53,600,000 and adjusted EBITDA of $4,500,000 We're very proud of our first half twenty twenty three EBITDA result of over 8,500,000 Our gross margin of 35.7 percent was consistent with our Q1 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.

Speaker 1

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 Inseego as efficiently as possible, which resulted in cash OpEx of close to $17,000,000 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 5 gs 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.

Speaker 1

2nd, 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 Inseego prior to last quarter and it has now happened 2 quarters in a row. Despite the variability in demand cycle, we are seeing enterprise Customers accelerate their investments in 5 gs as they gain a greater understanding of what 5 gs can do for their business. Now let me share a bit more detail about our FWA deployment progress.

Speaker 1

We're seeing deployments across both small and large companies. An increasing number of large well known companies have deployed 5 gs 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 2nd half of twenty twenty three, I'd like to share a few observations.

Speaker 1

First, we are expecting to see Modest revenue growth in the second half of twenty twenty three, driven by our FWA business. This is primarily a function of the Shift in mix from 4 gs to 5 gs products. 5 gs will continue to grow in the second half of the year, but largely offset by decline in our 4 gs business. 2nd, 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.

Speaker 1

3rd, 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've 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 And 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.

Speaker 1

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.

Speaker 2

Thank you, Ashish. First, I want to extend my thanks to the entire worldwide Inseego team For delivering another very solid quarter, delivering positive profitability and cash flow. Well done. Let me review the results of our Q2 fiscal 2023. Please note that all metrics and comparisons made are on a non GAAP basis.

Speaker 2

Please refer to our earnings release for additional details on the GAAP to non GAAP reconciliation. Q2 revenue was $53,600,000 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 5 gs devices and all our cloud software offerings Represented 81% of the total revenue in this quarter. Software revenue accounted for 29% of total revenue.

Speaker 2

2nd quarter IoT and Mobile Solutions revenue was $46,400,000 up 6.5% from the last quarter. The growth was driven by an uptake of our FWA solutions. Enterprise SaaS solution revenue was $7,200,000 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 percent 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.

Speaker 2

As Ashish alluded to in his comments, the meaningful improvement in gross margin on a year over year basis was attributable to significantly higher mix of FWA revenue. Gross margin for the enterprise SaaS segment Was 54.1 percent, up from 52.7 percent in Q1 and up from 49.4% in Q2 of 2022. Q2 non GAAP net loss was $2,000,000 or a negative $0.02 per share compared with a loss of $0.03 per share in the prior quarter and a loss of $0.04 per share in the year ago quarter. We reported an adjusted EBITDA gain of $4,500,000 which was up from a gain of $4,100,000 in Q1 and higher than the $1,000,000 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.

Speaker 2

Cash, cash equivalents and restricted cash at the end of Q1 Was $15,200,000 This cash balance was up from our cash balance of $8,700,000 in the prior quarter. With that, let me turn it back to Ashish for his closing comments.

Speaker 1

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 5 gs hardware and software. As 5 gs mid band coverage continues to scale, the breadth of our portfolio Gives me confidence in our ability to capture the many opportunities ahead.

Operator

The first question is from Scott Searle of ROTH Capital Partners. Please go ahead.

Speaker 3

Hey, good afternoon. Thanks for taking the questions. And guys, nice job on the quarter. Ashish, maybe to quickly follow-up, I want to make sure I heard some numbers correctly. I thought you said that the 5 gs FWA solution was 33% of the mix.

Speaker 3

Wanted to confirm that. Also, I'm not sure if I heard a mix number between 4 gs and 5 gs. 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.

Speaker 3

Is there a comparable number that you had for the

Speaker 4

Scott, hope you're doing well. Yes, 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 5 gs was over 50%, so close to like 52%, and 4 gs overall was close to 19%, 20% of the overall revenue.

Speaker 3

Great. Very helpful. And Bob, maybe for you on the OpEx front. You guys have tightened things up a little bit. R and D was up this quarter.

Speaker 3

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?

Speaker 2

Yes. Let me start yes, thanks, Scott. Good questions. Let me start with your second question. I would view OpEx as flat to slightly down as we go forward.

Speaker 2

So think in that way. And regarding your R and D question, actually cash R and 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.

Speaker 3

Great. And then maybe Ashish, just From a high level, looking at the opportunity in the pipeline for 5 gs FWA, I'm wondering if you could give us some metrics to kind of put around it. 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 the potentially the number of addressable devices that are under discussion.

Speaker 3

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 or we wait until 2024? Thanks.

Speaker 4

Yes, Scott. So what I would say is, right, the market buildup would be gradual, right, as I mentioned before. And the main reason really is that there are a number of different factors that every enterprise or SMB customer looks at, the offering itself is really good. Like the pipeline of interest from customers, we have Thousands of customers, SMB and enterprise customers who have filed the product, filed the 5 gs And they love it, but they all have different operational workflows, right, that they're trying to put on 5 gs 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 what we saw from our hotspot business in the past.

Speaker 4

And so it's a gradual step by step build, Lots of interest, pipeline continues to be super healthy from big Fortune 100, 500 companies To lots and lots of SMBs, and I would say like 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 few weeks for The customer will try the product and then start handing it out to their workforce, remote workforce To bigger use cases where our outdoor product is going on connecting like thousands of Locations, distributed locations, store locations for the customer and then kind of integrating the 5 gs WAN as part of their broader Network that's in place, the existing LAN and the existing LAN infrastructure. So those deployments Take a little bit of time, like they take I'll give you an example, like you have a large customer who trialed the product maybe 12 to 18 months ago and they tried for a few months, they loved the product and it's taken them like 8 to 10 months now to roll it out So in that case, it took time, but overall, The size of the business with each one of these enterprises is really good.

Speaker 3

Great. And maybe last one if I could. Just in terms of the channel for 5 gs fixed wireless access, you've got relationships with multiple carriers. I'm wondering if there's anything that's particularly

Speaker 4

Yes. I mean, we have multiple routes to market, as you mentioned, Scott. We have the traditional DSD and VAR channel. We have Multiple programs with different carriers. And I would say the initial push, we're getting a lot of assistance from the carriers.

Speaker 4

I They're obviously super motivated to sell a lot of 5 gs Vant Enterprises and they love our solutions and that's where I would

Speaker 3

Great. Thanks. I'll get back in the queue.

Speaker 2

Thanks, Scott.

Operator

The next question is from Lance Vitanza of Cowen and Tony, please go ahead.

Speaker 5

Hi, thanks guys. Congratulations on the quarter. A couple of questions here. First, so tell me if this makes sense. So you've got a fixed wireless access and cloud business.

Speaker 5

It looks like it's at about $145,000,000 revenue run rate And it's growing at 40% year on year. So I was just wondering, is it possible to talk about, I guess, 3 things. 1, How long do you see how long do you think you can maintain that type of growth or what does the growth plan look like over the next couple of years? 2, what is the fixed cost base necessary to support that, that growing revenue stream? And finally, what are the incremental margins?

Speaker 5

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, etcetera? I mean, I think those questions would really help us Triangulate on how to value this growing business? Thanks.

Speaker 4

Hey, Lance, good question. So let me try to break that down, right. So maybe I'll Talk about, 1st, 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.

Speaker 4

I It would be early in developing a new market, you see these up and down jumps. We'll see that, but in the next longer term, right, 4 to 6 quarters, whatever you have it, that should settle down. And I would say 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 at 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 5 gs business is when FWA grows, So will our software business will grow.

Speaker 4

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 Live span of every quarter to quarter, how that movie plays out, that just it's going to be step by step, If that makes sense. And then your last question about margins, I mean, I would just say, look, we're just getting started. I mean, We've got more growth on FWA coming. We've got multiple power packages They are very early in the adoption cycle. So as those things kick in, I mean, I definitely see that overall Gross margin target of over 40% is definitely very achievable.

Speaker 5

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.

Speaker 5

I'm just trying to understand the variance. It looks like your CapEx was pretty close to what we'd expected. So that doesn't explain it. But Can you is it possible for Bob maybe could you walk us just from EBITDA to free cash flow, dollars 4,500,000 of EBITDA, dollars 3,000,000 Calculating those sort of levered free cash flow, I'm guessing you had an inflow from working capital, working capital generated some cash. Is that accurate?

Speaker 2

Our working capital did moderate in a positive direction from a cash standpoint. And I'm just taking 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.

Speaker 2

And 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 2 or 3 quarters, we're not just from a forward Expectations to have, 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 movements.

Speaker 5

Okay. And then I did see something below the sort of the cash flow line. It looks like you raised $5,500,000 in the quarter from a public offering, and I'm wondering if you could provide more detail on that transaction or if I'm missing If I'm misreading that?

Speaker 2

Yes. No, no. Good, Lance. Yes, the other thing that was a contributor, kind of a non operational contributor, more of a financing, As we still had open capacity in the ATM 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, it's about 5,400,000

Speaker 5

Great. Thanks very much. That does it for me.

Speaker 2

Okay. Thank you much. Thanks, Matt.

Operator

The next question is from Tore Svanberg of Stifel. Please go ahead.

Speaker 6

Yes, good afternoon. This is Jeremy on for Tore. I guess, yes, 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 there is that complete now?

Speaker 6

Are there plans to continue raising capital? Or is this The $50,000,000 sufficient in the near to medium term?

Speaker 2

We right now, I think the best Way to handle it is, we don't have 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 factors. We've taken some additional cost And 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 tax standpoint.

Speaker 6

And just on those cost reductions in the latter part of the year, is that 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?

Speaker 4

Hi, Jeremy. So what I would say is the 17 In Berlin, cash OpEx, we have right now is, 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 $40,000,000 Costs that you've taken out of the company going back to last 4 quarters or so.

Speaker 6

Got it. Thank you. And then maybe switching to the backlog commentary, Ashish, that you provided, you said it was up Sequentially, the Q3 in a row. Can you help quantify that for us? And then when you talk about 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.

Speaker 6

Thank you.

Speaker 4

Yes. Yes. Good question, Jerry. Yes, I mean those orders that we can't fulfill get pushed out to the next quarter. For this quarter, like, look, we just finished the 1st month of the quarter and we are in a really good shape in terms of Our target revenue for this quarter, and it's all on supply chain now, right?

Speaker 4

So we're driving our See, it's really hard to fulfill that, those orders that we've got. So, in a bulk of the Revenue demand for this quarter, we already have orders for.

Speaker 6

Got it. And sorry if I missed it, but did you provide expectations for this quarter? You said you had a bulk of demand already in place.

Speaker 4

Yes. I mean, look, we're not providing exactly like the dollar number for the orders we have. I would just say like it's coming from multiple different customers And we're just we have unloaded everything we have in inventory for those specific products and we're now Quickly if I have to refill that inventory so we can ship the products to the customers.

Speaker 6

Got it. And then Last question before I jump back in the queue. But on the inventory side, it sounds like it's lower than you'd like when you're trying to refill that inventory. Can you give us what kind of targets you might have internally? And if you have any commentary in terms of Channel inventory, whether at your the VARs or suppliers or carriers?

Speaker 6

Yes.

Speaker 4

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 Toni, I think we're going to just run pretty moderate to what we have right now. And again, that's the whole reason we don't want Welcome on lot of inventories, just the demand cycles, the variability of the demand cycles within the quarters are still With the macro, they're still up and down. And so we just we're trying to be very cautious on trying to maximize The demand that we have with our customers and yet not, not bloat up the inventory as we had last year.

Speaker 6

Great. Thank you very much.

Speaker 4

Thank you, Jeremy.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Ashish Sharma for any closing remarks.

Speaker 4

Thank you, operator, and thank you, everyone, for joining us on the call We look forward to updating you all next quarter on our continued promise. Thank you again.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now

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