Inseego Corp. (NASDAQ:INSG) Q1 2024 Earnings Call Transcript

Inseego Corp. (NASDAQ:INSG) Q1 2024 Earnings Call Transcript May 9, 2024

Inseego Corp. beats earnings expectations. Reported EPS is $-0.36, expectations were $-0.49.

Operator: Hello, and welcome to Inseego Corp.’s First 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. After today’s presentation, there will be an opportunity for Q&A. On the call today are Phil Brace, Executive Chairman of Inseego’s Board of Directors; and Steven Gatoff, 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 are rather 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 the company’s form 10-K, 10-Q, and 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 call over to Phil Brace, Executive Chairman of Inseego. Please go ahead.

Phil Brace: Thank you, operator, and good afternoon, everyone. It’s a pleasure to be here. I’d like to cover three topics with you today. First, I’d like to give you a quick summary of the Q1 results. Second, I’d like to share some thoughts on our capital structure. And third, I’ll provide some high level view of the current quarter and focus areas ahead. I’ll then turn the call over to Steven and we’ll wrap up with some Q&A. Q1 2024 was a solid quarter for Inseego. Revenue came in at $45 million above our guidance and helped by strong year-over-year growth in our FWA business. Q1 adjusted EBITDA came in at $3.8 million, which was also better than expected and was driven by higher gross margin and lower operating expense. During the quarter, the sales organization launched a new channel program, which is an important part of starting to diversify the company’s revenue base and expand our go-to-market capabilities.

We are already starting to see opportunities developed there. Finally, the company also secured a significant renewal of a subscriber management platform at a major Tier 1 carrier customer. As I mentioned on the last call, addressing our capital structure is a significant focus for the company and the Board. While we still have much work to do, the company’s improved financial condition and business results give us confidence that there is a solution. Of particular note, we ended the quarter with more than $12 million in cash, which along with a $15 million prepayment on the subscriber management platform renewal, allowed us to repay our expenses ABL in April. As noted in the press release, the termination of the ABL decreases our interest expense meaningfully.

Importantly, it also now provides us with the capacity to entertain other capital structures like secure debt that will give us flexibility in terms of our ultimate capital structure and how we seek to restructure the existing convertible notes. The majority of the convertible notes are closely held and we are working on developing an acceptable solution. The Board is taking a deliberate, methodical approach and we are engaged with our legal and financial advisors. We will keep investors updated over the coming quarters as we continue to make progress. With that, I’d like to turn briefly to our CEO search progress. The interest has been robust and we have identified a number of qualified candidates. Having said that, we are being thoughtful about moving forward, particularly as we navigate the important capital structure considerations I just talked about.

Looking at the business, the outlook for the quarter is for continued growth in revenue and profit. We are seeing good demand for our FWA business and we are starting to see a rebound in the mobile business. We are looking ahead for the back half of the year and beyond as we’re also building a number of exciting new product and software opportunities in both the carrier and the MSO space based on the strength of our roadmap. With that, I’d like to thank the team at Inseego who worked every day to make these things happen. I’m glad to take any questions in a few minutes. Right now, I’d like to pass the call over to Steven.

Steven Gatoff: Thanks, Phil. Good afternoon, everyone. I look forward to covering three things with you today. First, I’ll take you through the Q1 2024 financial results. Second, I’d like to address some new language that the accounting rules require we have in our 10-Q that’s getting filed tonight. And third, I’ll provide some color on the business and our guidance for Q2. As Phil noted, we’ll of course wrap up by opening the call to your questions. With that, let’s start with Q1 results. Total revenue came in above guidance and $2.2 million or more than 5% higher sequentially at $45 million. Overall, performance in the FWA product both sequentially and year-over-year and growth in our telematics and subscriber management platform offerings all contributed to better than anticipated revenue performance on a general uptick in demand and sales execution in the quarter.

As we’ve talked about previously, while we expected Q1 mobile hotspot revenue to be down on the transition of the 4G product end of life in the previous quarter, the mobile hotspot business came in ahead of expectations in Q1 on carrier uptake of our 5G products. FWA also saw good carrier demand in Q1 that drove year-over-year revenue growth of nearly 20%. The higher gross, higher margin FWA product now constitutes about a third of the company’s revenue, up from 23% in the same quarter in 2023. Looking at services and other revenue, as I mentioned, the telematics business came in ahead of expectations and at its highest quarterly revenue ever on good continued demand in the business. In addition to the telematics contribution to growth, Q1 revenue from our subscribed SaaS offering also came in ahead of expectations and was up sequentially over Q4.

As Phil mentioned, we were pleased that one of our key carrier partners signed a new deal with us during the quarter. It began on April 1 and provides Inseego with increased revenue and profitability for the next two years as we manage the investment and growth in our FWA and mobility businesses. Moving on to gross margin, Q1 gross margin percentage came in at 38.7% on a non-GAAP basis. This was among the highest level in seven quarters and like the prior quarter in Q4 was impacted by some one-time items. Product gross margin benefited from a one-time pickup from components rebates, while services and other margin was lower on a higher proportion of professional services revenue in a subscribed business in Q1 that we don’t expect to continue going forward.

Looking at non-GAAP operating expenses, Q1 came in favorable to Q4 and in line with expectations. Sequential efficiencies in R&D and reductions in depreciation and amortization expense were partially offset by executive severance costs in G&A in the first quarter. We continue to take a disciplined approach to managing our spend across the organizations, favoring pipeline and revenue generating sales and marketing spend and differentiation oriented R&D spend. Also of note, and so far as overall expenses in Q1, for the first time in several years, the company’s P&L contains accrued expense for incentive bonus plans for the company’s employees. Previously, no such incentive was accrued or paid. With Inseego’s improving operating performance, growing profitability, and increasing free cash flow, we’re pleased to be able to return to more market-based compensation arrangements for the terrific group of employees that are driving a turnaround here in the business.

Putting this all together, the favorable revenue performance and more focused operating expense resulted in Q1 adjusted EBITDA coming in higher than anticipated at $3.8 million, a margin of nearly 9%, and the fifth consecutive quarter of positive adjusted EBITDA. Wrapping up our Q1 results with the balance sheet, cash improved meaningfully from year-end, coming in at $12.3 million at March 31. And while we’ve had $4.7 million drawn on our credit facility at the end of Q1, as Phil mentioned, we voluntarily paid that off and terminated ABL facility in April. Additionally, the combination of the $15 million upfront payment on a subscribed renewal in April 2024 and our improving financial profile has provided a company with a liquidity on hand to finance our working capital needs going forward.

With that, I’d like to move to my second topic today and callout some new language that’s going to be in our 10-Q that’s getting filed tonight that relates to the accounting rules around our outstanding convertible notes. As you heard Phil say, we’re being methodical and thoughtful about how we move forward to achieve an outcome that’s optimized for our stockholders and relevant stakeholders in restructuring and refinancing the convertible notes. With the maturity of the notes now technically being one year out in May 2025, the accounting rules dictate that we include wording in our 10-Q that’s typically referred to as going concern language because while we are engaged with our bondholders to restructure and refinance the notes, we cannot be 100% assured that the desired restructuring and refinancing will be accomplished.

It shouldn’t go without noting that Inseego is in a positive and fairly uncommon position and including this required accounting disclosure. We’re profitable on an adjusted EBITDA basis. We’re free cash flow positive. We don’t need any financing for operations, and we’re continuing to improve our near-term liquidity. With that, let’s turn to the third discussion topic on what we see in the current quarter. On product revenue, there are two drivers of higher revenue in Q2 over Q1. First, we’re seeing strong carrier demand for our mobile products from a combination of increased structural demand as well as some more perishable in quarter promotions at one of our carrier customers. Second, we’re continuing to see growth at FWA in Q2 on early traction from the Q1 relaunch and rebranding of the Inseego channel program Inseego Ignite.

Services and other revenue is also seeing sequential revenue growth in Q2, driven by the increased revenue from the subscribe renewal that’s adding a combination of SaaS subscription expansion and additional professional services revenue. Pulling this together, Q2 non-GAAP gross margin percentage is expected to be down slightly on product mix as the high margin subscribe revenue is offset by an even greater increase in the lower gross margin mobile revenue. Q2 non-GAAP operating expenses are expected to be relatively flat on a dollar basis over Q1. And so considering all this, we’re providing the following guidance for Q2 2024. Total revenue in a range of $52 million to $56 million, and adjusted EBITDA in a range of $6.5 million to $7.5 million.

In closing, we’re pleased with the results that we delivered in Q1, and we’re encouraged by the several positive dynamics going on in the business that are driving greater revenue and profitability in Q2. With that, we appreciate your time and support, and we’re glad to open the call for questions. Operator?

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Tore Svanberg with Stifel. Please go ahead.

Tore Svanberg: Yes. Thank you and congratulations on the continuous progress here. So my first question is on the Q2 guidance. So just from a mix perspective, just so I understand this. So product revenue obviously up, but carrier up more than fixed wireless. And then what were some of the moving parts on the services again, please.

Steven Gatoff: Sure. Hey Tore, it’s Steven. So what we talked about was that the subscribe renewal is coming in and we’re successful in negotiating a higher revenue for that. And so in services and others, the subscribe business, that’s driving the bigger increase in revenue on that piece. And as you said in product revenue, we talked about the increased revenue coming from both mobile and FWA.

Tore Svanberg: Great. And as my follow-up, this sort of new language that’s coming into 10-Q, so is this sort of a recent accounting rule change, or was this kind of more you were notified about this is just typical language that you have to include.

Steven Gatoff: Yes, neither of those. We were not notified at all. It’s really a self-reporting and description, but not for the financials. And it really is the standard, if you will, accounting requirement for what they define as a going concern. And so they look to say, okay, you’re one year out from the maturity of the notes, $163 million of notes, and in the capital structure. And so because those are now within one year, they’re considered current. And so if you look technically at the cash balance, it’s not $160 million. And so that requires triggers the disclosure of that language, the quote going concern language, because of the capital structure.

Tore Svanberg: Sounds good. Actually, just one last one. You mentioned telematics revenue reaching a record in this quarter. Is that business expected to be up as well in the June quarter or we’ll take a breather?

Steven Gatoff: Probably more of the latter. We were pleased that it, in the first quarter, it did nicely coming off of 2023, but our expectations are that it kind of continues at a consistent approach.

Operator: The next question is from Lance Vitanza with TD Cowen. Please go ahead.

Lance Vitanza: Hi, thanks, guys. And first off, congratulations, great quarter. I guess, let me just start with the first quarter, and we’ll get to the guidance in a second. But revenue was up 5% sequentially. I assume that’s the right way to analyze revenue growth at this stage. And so I’m just wondering if there’s anything unusual there from a timing perspective either. I’m guessing not pulled forward given the guidance, but perhaps that got pushed out of the fourth quarter of last year and into the first quarter.

Steven Gatoff: On which piece, specifically in general?

Lance Vitanza: On revenue, yes.

Steven Gatoff: Yes. The short answer is no. There was nothing meaningfully that got pushed from Q4 into Q1 and nothing that got pulled from Q2 into Q1. It’s a pretty in quarter demand gen and execution quarter.

Lance Vitanza: Okay. Okay, great. And then so, on the second quarter guide, right, so it’s 20% sequential growth at the mid-point. And I’m wondering how much of that is an artifact of the prepayment that you took in April. I assume that you’re not recognizing the $15 million; it’s a prepayment, right? So how much of that $15 million are you recognizing in the second quarter? And then can you give us just at least a rough feel for how quickly the rest of that prepayment will be recognized as revenue over the balance of the year going forward?

Steven Gatoff: Sure. The easy answer both conceptually business wise and financially is the prepayment does not affect revenue recognition at all zero. So it just affects cash. We had more cash on hand, which was helpful. That contract is basically taken straight-line ratably over the three-year period. So the fact that we had prepayment upfront has zero impact on the P&L, on revenue recognition. It’s progress is a rapidly over the period.

Lance Vitanza: Okay. Great. So then I guess my question is, you’ve got — how much confidence do you have in the visibility of revenues at this point and what’s changed, because it wasn’t that long ago, and I know this predates you, but that it wasn’t that long ago that the leadership of this company was fairly adamant that they had virtually no visibility.

Steven Gatoff: Yes. It’s a fair and understandable question and Phil and I will tag team on it a bit. But the news on guidance, looking at Q2, the quarter we’re in, as we said, we are bullish on the business itself on the product business specifically. There’s a lot of activity going on in the second half of the quarter kind of right now, which is why you see us saying, okay, there’s some demand that we think, it looks potentially perishable, meaning it’s imported promotions. And the big question is going to be, as we — some of the new team and others, as we evolve the business and grow more is, how the increase in demand and how the increase in the channel program and how well they’ve done, how much of that is sustainable growth in Q3 and Q4.

So right now we’re not being presumptuous on what we think we can do. We’re encouraged right now. And so the visibility comes because I think, and we’ll try [indiscernible] it’s a combination of increasing demand in longer-term. So that helps by definition. And then also our view is that just a different rigor and cadence in the business. Steve Harmon and the sales team track the business differently. Everything is in sales force. We have pipeline review calls where we talk about what Q3 and what Q4 look like now. And so there’s just a different construct of how we look at the business than perhaps was here a year ago with different folks. So that’s certainly part of it. And it’s probably a bit of an uptick in demand in the market.

Lance Vitanza: And — go ahead. Sorry. Please.

Phil Brace: Yes, no problem. I mean, I think just in general, look, we’re seeing strong demand across the Board from our FWA products. You mentioned we’ve got some promotional activity that we’re trying to take advantage of make hay when the Sun shines, if you will, for the quarter. So I think we’ve got some of that we’re trying to take advantage of. And the subscribe renewal helps as well. So this is a situation where we have some bit of a tailwind given by some of our strong product roadmap. The customer acceptance has been good and we’ll just go from there.

Lance Vitanza: If I could just squeeze one more in before I jump back in queue. The fact that this carrier was incentivized to give you a $15 million prepayment, that suggests to me that the pricing trends that you guys are seeing are most likely in your favor and that the carrier was trying to get ahead of perhaps escalating prices over time. Is that a reasonable read or were there some other factors that we’re not privy to behind the scenes that might have driven that prepayment? Thanks.

Phil Brace: Look, I think that, I mean, you’ll see the effect of that particular renewal in our financials and so you can make assumptions about what that is. In particular prepayment, we’ve worked very closely with this customer for many years. This product’s been invented for a long time, and we had a — we had — it was one facet of a multi-faceted negotiation and we were able to successfully negotiate it. So I wouldn’t read too much more into it than that.

Operator: Next, we have a follow-up question from Tore Svanberg. Please go ahead.

Tore Svanberg: Yes. Thank you. Phil, I had a question on the channel program. This is obviously something that’s going to diversify the revenue base. Could you talk about what some of the areas that you are targeting from that program? And also from an OpEx perspective, what does that program necessarily mean? I obviously assume that’s already included in your 2Q guidance. But even beyond that, would you have to invest more OpEx dollars to get that program up and rapid?

Phil Brace: Yes. Let me try the best to answer that and Steven can jump in here if I’m wrong. So look, what we’re trying to do here, historically, the company has, say, the revenue per profile the company has been dominated by very large carrier customers, and we’re very thankful to have them. And they mean a lot to us and it’s an important part of the business for us obviously. Also for our own duty perspective, we need to diversify that revenue base, so we’re not as dependent on those large customers. And so some things that happens there, those customers tend to be focused on more specialized, higher value solutions where we’re part of the solution, and frankly, the sales team has an experience. The new sales team that we’re bringing out has experience in building programs around that, and that’s going to be part of our revenue diversification strategy going forward.

With respect to additional costs, we’re — our goal is to actually reallocate existing capital to fund that or self-fund that. So I would not expect any significant change in our cost profile as a result of doing that. We’re choosing where we spend the money.

Tore Svanberg: That’s great perspective. Thank you.

Phil Brace: Yes.

Operator: Next, we have a follow-up from Lance Vitanza. Please go ahead.

Lance Vitanza: Hey, thanks, guys. Thanks for letting me jump back in here. I wanted to ask you about cash balance at the end of the first quarter. So before the prepayment came in, you are — you put up $12 million of cash, which was actually recognizing. It’s not a lot in absolute dollars, but it was well ahead than we had estimated. And I’m just hoping you could maybe explain that the beat in your cash at the end of the quarter seemed considerably larger than the beat in EBITDA. We’re pleased to see both, but so I’m guessing that you had some favorable working capital inflows in the first quarter. Is that correct? And if so, will those reverse later in the year? I’m just thinking about how we should model your cash flows from here on out.

Steven Gatoff: Yes, that’s right. I think, essentially recall the conversation we had from Q4, where the cash flow at year end and the cash balance was a little bit lighter. And so there’s a view that that was a timing difference between Q4 and Q1. If you look at the two together, it’s pretty consistent quarter-to-quarter. And so, one, we expect a bit of an uptick in Q2, as you would suspect with the core business growing and the EBITDA profitability growing, and then we’ll see what happens in the back half of the year, but we expect it to be consistent.

Operator: This concludes our question-and-answer session, and it concludes our conference. Thank you for attending today’s presentation. You may now disconnect.