Inseego Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 5 speakers on the call.

Operator

Hello, and welcome to Inseego Corp's Second 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. On the call today are Phil Brace, Executive Chairman of Inseego's Board of Directors and Stephen Gatoff, the company's Chief Financial Officer. During this call, certain non GAAP financial measures will be discussed.

Operator

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 ks, 10 Q and other SEC filings, which are available on the company's website.

Operator

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 call over to Phil Brace, Executive Chairman of Inseego. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. It's a pleasure to be with you today. I'd like to cover 3 topics with you today. 1st, I'd like to provide a high level view of the Q2 results. 2nd, I'd like to share my perspective on the accomplishments that we made improving our capital structure.

Speaker 1

And 3rd, I'll comment on the current quarter and focus areas. I'll then turn the call over to Steven and we'll wrap up with Q and A. Q2 2024 was a very strong quarter for Inseego. Revenue came in at $59,000,000 above our guidance and helped by strong year over year growth in our mobile business and the effects of the previously discussed renewal of our subscribed management platform at a major customer. Q1 adjusted EBITDA came in at 8,300,000 dollars which was also better than expected and was driven by strong gross margin percentage and solid OpEx control.

Speaker 1

During the quarter, the company continued to add leadership capability to the teams in both new sales and operations executives, and we are already seeing the impact of these additions. During the quarter, we made significant progress on addressing our capital structure. Improved financial performance enabled a series of transactions that resulted in restructuring the majority of our outstanding convert for a mixture of cash, new favorable long term debt, common equity and warrants. This is a very positive outcome for the company and we received strong support from our largest bondholders and our largest stockholder. As Stephen will talk about in his prepared remarks, the pro form a impact results in significantly less debt and a very manageable leverage profile.

Speaker 1

While we still have some work to do, I'm very pleased with the progress today. I'd like to mention briefly our CEO search. As you saw earlier in the week in our filing, I was pleased to extend my term as Executive Chairman of the Board in order to provide some time to finish the restructure work as well as continue supporting the good momentum in the business. The Board and I are taking a deliberate and methodical approach to the search. The company is currently working well and I have an excellent engagement with the executive team and the Board to drive things forward.

Speaker 1

On this last front, the outlook for the quarter is for continued year over growth in revenue, profit and cash generation. On the product front, our next generation products are well in development, which I will which I believe will continue to advance our capabilities and provide increased value to our customers. With the new capital structure, improved financial performance, a strong product roadmap and large growing margins, the future for Inseego is bright. With that, I'd like to thank the team at Inseego who work every day to make these things happen. I'm glad to take any questions in a few minutes.

Speaker 1

But right now, I'd like to pass the call over to Steven. Thanks, Phil. Good afternoon, everyone. I look forward to covering 3 things with you today. First, I'll take you through the details of our Q2 2024 financial results.

Speaker 1

2nd, I'd like to share some more information on the important transactions that we executed to restructure our convertible notes and improve our capital structure. And 3rd, I'll provide some color on the business and guidance for Q3. As Phil mentioned, as we always do, we'll of course wrap up by opening the call to your questions. With that, let's start with our Q2 results. Still highlighted, total revenue came in well above guidance at $59,100,000 Revenue grew sequentially over Q1 by more than $14,000,000 or 31 percent.

Speaker 1

And for the first time in nearly 3 years, total revenue grew year over year coming in at positive 10% over Q2 2023. The 2 primary growth drivers were 1, strong performance in the carrier mobile hotspot business on the product side, where Q2 revenue was up 37% year over year on our carrier partner MiFi promotion that we mentioned on the last call and 2, growth in our subscribed SaaS offering from the contract renewal that went into effect April 1 and that we also mentioned last call. Looking at FWA product revenue that came in at essentially the average of the past several quarters. A last time 4 gs buy helped shore up the quarter as our newly implemented channel program takes some time to ramp up and our new team builds pipeline and drives their initiatives in the space. Rounding out services and other revenue, our telematics business came in at a consistent and record high level as it did in the previous quarter on good continued global demand and execution in the business.

Speaker 1

Moving on to gross margin. Q2 gross margin percentage came in at 39% on a non GAAP basis consistent with the prior quarter and among the highest level in the past 2 years. Looking at non GAAP operating expenses, while a slight uptick in sequential spend from Q1, sound expense management and efficiency efforts saw Q2 total OpEx spend come in lower than it was year over year, both in terms of aggregate dollars and as a percentage of revenue. OpEx was 32% of revenue in Q2 2024, down favorably from 39% in the prior quarter and down favorably from 37% sequentially in Q2 of 2023 year over year, I apologize. We realized efficiencies on a percentage of revenue basis in all areas of OpEx in Q2 from sales and marketing to R and D to G and A.

Speaker 1

It's notable that this strong expense outcome was achieved even after including accrual this quarter for an annual cash incentive bonus for the terrific Inseego employee base. We shared a bit about this on the last call and so far as it being new incremental spend this year, noting that cash bonus expense hasn't been included or paid in the past several years. Now it will be and it is self funded. Putting this all together, the favorable revenue performance and focused operating expense management resulted in Q2 adjusted EBITDA dollars coming in at more than double the prior Q1 quarter at $8,400,000 and at a record high margin of 14%. It was also the 6th consecutive quarter of positive adjusted EBITDA.

Speaker 1

These improved operating results allowed us to deliver GAAP operating and net Cash improved meaningfully from Q1 coming in at Cash improved meaningfully from Q1 coming in at $49,000,000 at June 30. Our cash on hand benefited from 3 positive dynamics. 1, the ongoing higher profitability and net cash generation of the business in Q2 2, the advantageous April 2024 $15,000,000 upfront payment on the multi year subscribed SaaS contract renewal that we mentioned. And 3, as I'll talk about more in a few minutes, there was a timing benefit from the short term loan that we took out to repurchase a large convertible bondholder at a discount that funded 16 $500,000 on that Friday, June 28, the last business day of June. Accordingly, that funded loan cash shows up on our balance sheet at the June quarter end.

Speaker 1

With the $32,000,000 purchase of the bonds occurring on the next business day on Monday, July 1, that use of cash and the resulting reduction of debt was technically in Q3 and will be reflected in our Q3 2024 balance sheet. As we also discussed briefly on our last call as a subsequent event, in Q2, we voluntarily paid off and terminated the relatively restrictive and expensive ABL credit facility. This action had a number of benefits, including freeing up capital and providing good operating flexibility and that enabled us to enter into the various transactions to address our convertible bonds. The final point to make on the balance sheet is that with the convertible notes now being due within a year, you'll see them presented in the short term liabilities section of the balance sheet. The good news is clearly that we purchased or refinanced nearly 90% of the bonds and with the support from some of our largest and longest standing stakeholders, we achieved a solid outcome.

Speaker 1

With that, let's move on to my second topic and look at the convertible note restructuring and capital structure improvements that we accomplished in the past few months. As you heard us say over the past several quarters, we've been methodical about driving a thoughtful and optimized outcome for our stockholders and relevant stakeholders in restructuring the convertible notes and reducing our overall debt levels. This has been a multi step process with a lot of considerations. Over the past 75 days, we engaged with all of the top 10 holders of the convertible notes and we have either purchased or entered into binding agreements to exchange the remaining bonds for long term debt and or equity that covers $142,000,000 or 88% of the $162,000,000 in face value of the bonds. Pro form a for these transactions, there was only $19,900,000 of convertible notes remaining outstanding with new long term debt of $36,600,000 and a short term loan of $19,500,000 That brings pro form a total debt to $76,000,000 on LTM adjusted EBITDA of approximately $20,000,000 Our pro form a net debt is an even lower leverage ratio of less than 3 times.

Speaker 1

This is a meaningful reduction in debt and a far more appropriate leverage profile for the company. As a final note on the debt restructurings, we wanted to also call out an advantageous feature that we were successful in structuring. As part of these transactions, the warrants that were issued to bondholders who exchange their convertible bonds for new long term debt and equity are cash pay. That means that upon their exercise, the company will receive approximately $32,000,000 in cash transactions and accomplished a meaningful reduction of debt and rightsizing of our capital structure. Adding that positive dynamic to our profitable operations, free cash flow generation and continuing growth, we see the company as now very well positioned and financially strong to support driving further stockholder value.

Speaker 1

So with that, let's turn to the 3rd topic on what we're seeing in the business in the current quarter and provide our guidance for Q3. Overall, we're bullish on delivering revenue growth and expect to continue to show improvements in terms of year over year performance. On mobile broadband, we have good visibility and confidence in our ability to deliver robust year over year growth again in Q3 as we're continuing to drive our mobile broadband products through our large carrier partner promotion. We'll see the extent to which Q3 yields the same robust quarterly results that Q2 produced. On FWA, we continue to invest in building pipeline and the overall channel program and expect marginally lower FWA revenue in Q3 considering the FWA last time 4 gs buy I mentioned that occurred in Q2.

Speaker 1

On services and other revenue, we expect to have another solid quarter in Q3 and come in at levels consistent with Q2, 2020, 2024 on a dollar basis. And Savara's gross margin, Q3, 2024 non GAAP gross margin percentage is expected to be relatively consistent with the prior Q2, noting that the final revenue mix in Q3 between mobile broadband, FWA and services and other will be the ultimate determinant. Q3 non GAAP operating expenses are expected to be relatively flat over Q2 in the $19,000,000 range. And so considering all this, we're providing the following guidance for Q3, twenty twenty four. Total revenue in the range of $54,000,000 to 58 $1,000,000 and adjusted EBITDA in a range of $6,500,000 to $7,500,000 In closing, we're glad to see the strong growth and profitability delivered in Q2 and we're encouraged by the positive dynamics in the business are driving continued revenue growth and profitability as we move through 2024.

Speaker 1

With that, we appreciate your time and support and we're glad to open the call for any questions. Operator?

Operator

We will now begin the question and answer session. And our first question will come from Lance Vitanza of TD Cowen. Please go ahead.

Speaker 2

Thanks and congratulations on a strong quarter. On the revenue side, I was particularly impressed with the mobile hotspot sales growth. Wondering, do you have much visibility into end market demand and sell through? And presumably, the quarter saw a lot of restocking or stocking up, but is it possible to talk about underlying strength or weakness in final demand?

Speaker 1

Yes. Hi, Lance. This is Phil. I mean, we kind of teased this on a little bit of the call. We had we kind of initiated collectively with 1 of our big carrier partners a program and frankly the program has gone really, really well.

Speaker 1

And you'll see that our inventory has actually gone down through the quarter as well and kind of representing us kind of shipping a lot of products there in that space. Our demand looks to be strong for the quarter. Some of these things I would say are a little bit perishable, right? There's a product, there's a promotion going on and they're executing well and we're delivering well. And I'll say right now, we are scrambling for parts, right?

Speaker 1

We are exercising our supply chain and the demand has gone up, especially we're scrambling for parts. So right now the demand and our visibility of the demand is good. And we're just trying to take advantage of the opportunity while it exists. Great.

Speaker 2

Thanks. And then turning to the gross margin side, very impressive performance there, up nicely year over year. I'd like to think as much in terms of the incremental gross margin you achieved as revenues expanded. So revenues were up $5,600,000 year on year, while gross profit was up $3,900,000 on a non GAAP basis. So that's like a 70% incremental margin, which I got to think means that you've removed a decent amount fixed costs from the business.

Speaker 2

I don't think I can remember seeing a 70% incremental margin at Inseego. And if it was, it wasn't anytime recently. So nice job there. But can you talk about I know you mentioned they were coming in all areas, but is there anything more granular that you can tell us that would help us gauge how durable these changes might be in subsequent periods?

Speaker 1

And Yes. I'll try just to high level and then Steven, you want to just help with some of the details. I mean, look, at a high level year over year, I would characterize it as three things. 1, you're seeing good OpEx control, okay? So year over year, we did make some we don't have a ton of fixed costs necessarily, but I think our cost structure has improved and I think we've been disciplined on how we do that.

Speaker 1

I think you've also seen mix improvement and you've also seen just core product gross margin improvement there as well. So I'd say there's probably 3 big things that drive that. Whether it's sustainable, look, I think the OpEx stuff is going to be sustainable. We're pretty focused on that as a company. And I think the gross margin going forward is going to really be dominated by mix, I would say, the mix between the products.

Speaker 1

So I don't know if Stephen? Yes. Lance, it's a really good question and Phil's good points. If you look at at least 2 of those big buckets on the cost side, which was a big driver looking back year over year, my first quarter here in Q3, we immediately implemented a cost restructuring and we really hunkered down, looked at the business and took out a lot of costs just wholesale. And so you saw an uptick in margins pretty much right after that beginning in Q4.

Speaker 1

So that was part of the structural cost structure that Phil mentioned. So that's part and that's pretty sustainable, right? That's up to us to continue to manage that. And then 2, the nitty gritty behind Phil's points are that we basically have now higher margin 5 gs mobile products as opposed to the back half of last year, certainly most of the year actually, lower margin 4 gs was more of the mobile broadband. And so that structurally has changed and so that's a bit of an uptick in margins on a fairly sustainable basis.

Speaker 2

Great. And then I guess the last one for me, you did make a bunch of notable hires in the quarter year to date. And I'm just, I think that's great in terms of aligning the company for further growth. I'd imagine that that's also an important priority for you. Should we expect will there be any sort of near term compression in the kind of below the gross profit line margin, so to speak, just our SG and A going up in the short term perhaps to sort of accommodate the incremental personnel and so forth?

Speaker 2

Or is that not all that noticeable?

Speaker 1

The punch line is that folks we added and brought in and recruited and headcount ads were done very, very decidedly, surgically and kind of a rifle shot, if you will. And in many cases, there was some organizational changes, pruning and it was a switch out. So they were not all gross adds. So it's a good question. I'm glad you clarified it, Lance.

Speaker 1

Like these are not a step function increase in the cost structure. These are really adding folks and skills for the direction that we're headed and there are some that we didn't need in what we've done in the past. So we maintain control over total headcount and compensation to do that. So we do look at it as something that we're focused on adding while we drive growth, but also maintain profitability. And so net net, the punch line also on OpEx is and I think I mentioned this a little bit in the script, if you will, that total OpEx we expect to be pretty flat on a total dollar basis Q2 to Q3 and probably even going forward.

Speaker 1

Maybe sales and marketing is a little bit higher, but then we have some savings on G and A. And so there's a little bit trade offs, but net net, we're managing it pretty tightly.

Speaker 2

Great. All right. Well, thanks for taking the questions.

Speaker 1

Yes, sure. Thank you.

Operator

The next question comes from Scott Searle of ROTH Capital. Please go ahead.

Speaker 3

Hey, good afternoon. Thanks for my question. Great job on

Speaker 1

the quarter guys. It's phenomenal what

Speaker 3

you've done and I guess over a 3 quarter period. I apologize, I got on the call late, so I hope I'm not being redundant here. But looking at the services line, it's a big step up sequentially. Steve, is there a one time item in there or something of note or is that a sustainable level? And then as we're looking out to the September guidance, I'm wondering if you could just give us directionally some of your thought process in terms of how hotspot is trending versus services?

Speaker 3

And then I had a couple of follow ups.

Speaker 1

Hey, Scott, I got the first one on services and revenue, but I apologize, I was chalky on our end. I didn't get the question on the mobile hot spot business for Q3 guidance. I didn't get what the question was.

Speaker 3

My apologies. Sequential outlook, Steve, for hot spots, fixed wireless access.

Speaker 1

Got you. Okay. Yes, Phil and I will tag team. I'll maybe start with some of the numbers and color and then macro it up for Phil to take. The punch line on services and others, we were really pleased at the beginning of the quarter, the end of last quarter to renew our Inseego subscribe, which is a billing subscriber billing and subscriber management platform with a large carrier customer, and we were able to secure an uptick in the pricing of that.

Speaker 1

We mentioned that on an earlier call just so no one's surprised by it. It went into effect this quarter though. So April 1 is when it went into effect. So you saw a full quarter's impact in Q2 and therefore the step up in revenue from Q1 to Q2. And that is a 2 year essentially fixed contract.

Speaker 1

And so that is probably the definition of sustainable. And so we're pretty pleased with that all the way around. It's a really great customer relationship with them and are doing some great work. And so we're pleased to go extend that out. So that kind of adds a lot of color and kind of good substance to services and other.

Speaker 1

And then as we talked a little bit about on the mobile broadband side, we're seeing really nice uptake in the product overall and even specifically through one of our large carrier customer promotions that did really well in Q2. We are engaged with them again in Q3. And so we have high hopes and expectations and have good visibility and we'll see we're a little bit into the quarter, so that's helpful and it's going well. And we have obviously 2 more months left. So we'll see to what level that reaches, but we do expect a strong quarter for mobile broadband solutions for Q3, we'll see to what extent that comes to the Q2 levels as we move forward.

Speaker 3

Very helpful. And in terms of diversification, you still remain fairly concentrated with a couple of large mobile operators in North America. I'm wondering how you guys are progressing in terms of your diversification efforts, both for mobile hotspot and fixed wireless access, if there's any insight you could give us on that front?

Speaker 1

Yes, Scott, I'll take that one. So that does remain a priority for us. Obviously, we love our biggest customers. We spend a lot of time there and we continue to work hard to earn their business every single day. But we also recognize that we need to diversify ourselves a little bit.

Speaker 1

And so you've seen us make some investments in kind of building up a value added reseller channel. One of the things we've got to work for there and you saw one of the announcements is we've got to actually have some slightly differentiated products there. For example, when you sell into a particular large carrier, you might imagine that certifications are specific to that carrier. When you sell into a broader reseller channel, you've got to have products that are multi carrier capable and requires different certs and maybe in some cases even have some different capabilities like multi tenant management and things like that. So I would say we are committed to continue to make the investments to go on that front.

Speaker 1

It's moving not as fast as I expected, but sometimes these things take some time. And so that's going to be an area I'd continue to ask us for and it's going to be an area a watch item for us as a management team as we go forward in the quarters.

Speaker 3

And Phil, lastly, if I could, congratulations. It's nice to see you're going to be sticking around for a while in the Executive Chairman role. Along those lines and I apologize if you cover this earlier, but your priorities now going forward over the next 12 months. And as part of that, given the recap that you guys have executed over the past quarter, do you start thinking about going on the offensive from an M and A standpoint? Thanks.

Speaker 1

Yes, good question. I mean, look, I mean, we still have some work to do on the restructure side, okay. So priority number 1 for me is to kind of finish up the last few little bits of that. As I mentioned in my prepared remarks, we are taking a deliberate and thoughtful approach on the CEO search, but I've got great support from the Board and from the management team. And in terms of priorities, I think what we're going to be doing looking at is kind of expanding our revenue diversity.

Speaker 1

We're going to be looking at expanding the portfolio footprint. And certainly, I think to the extent that we get ourselves on solid footing and growing, I certainly think we'll be looking both at organic and inorganic opportunities. But I think our priority right now is just to continue to restructure, get us to start realizing fruits of some of that labor like we already have. And then I got to say, it's just it's a pleasure to be even at the point where we can consider talking about doing some of those things from where we were just a few quarters ago. So thank you for asking the question.

Speaker 1

That made me smile.

Speaker 3

Again, congrats and thanks so much.

Speaker 1

Thank you. Thanks, Doug.

Operator

The next question comes from Kyle Smith of Stifel. Please go ahead.

Speaker 4

Hey, guys. Kyle Smith on for Tore Sandberg at Stifel. Also wanted to extend my congrats on the strong results and improved capital structure. My first question is on geographic revenue. So any trends or surprises to note in the June quarter?

Speaker 4

And where do you see the company's geographic mix shift in over time?

Speaker 1

Yes, Stephen, thanks, Kyle. The short answer is no, no surprises. The geography of the business tracks pretty closely to the businesses that we do. The vast majority is North America centric, which is the products business and the subscribe business. And then we have the telematics business that interestingly is not North America, right?

Speaker 1

It's Europe and ANZ. And so those businesses continue to operate well in their respective regions. And I think to Phil's good points, there's a whole bunch of work that we've been doing in the last three quarters or so since we all got here, to really grow the business and grow it profitably that we're focused on continuing to do that, that we're not looking to go do any big global shifts or expansions in the business. And so we're kind of focusing on our knitting and the geographic concentration kind of is what it is right now.

Speaker 4

Very helpful. Thanks. Switching gears a bit, the press release mentioned the Ignite channel program, which was also highlighted on the prior earnings call. Maybe if you could give us an update on the progress of the program and remind us of the competitive differentiation and benefits that the program provides?

Speaker 1

Yes, it's a good question. I mean, so really, I mean, Inseego for the most part, prior to this program being launched, have been, I would say, exclusively a major carrier product. That's how we went through that. And so we have brought on some new executives. We've kind of launched a new program for the resellers that included some unique packaging options.

Speaker 1

I mentioned we'll be doing some more differentiated products including multi carrier certifications. And really the goal there is to expand our reach because in many cases, a lot of these products, particularly on the FWA side, but even on the MiFID side are sold to small and medium businesses, sometimes even sold to governments, local, federal, state institutions via resellers. And I think our goal is to kind of expand our reach into that channel. We know that some of the competitors exist and have a robust business in that space. And I think we are coming at it, frankly, from a differentiated point of view and that we have a rugged excuse me, a very compact design, embedded antennas that are included in there, unique packaging and decades of experience in this space that have been validated by the major carriers.

Speaker 1

And so I think we're going to have a unique value proposition. And so this takes a little time to develop and that's going to be a focus area that I need to continue we need to continue to hold ourselves accountable to continue to build that.

Speaker 4

Great. Thanks everyone and congrats again.

Speaker 1

Right on. Thanks.

Operator

This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation and you may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
Inseego Q2 2024
00:00 / 00:00
Remove Ads