Inseego Corp. (INSG) Q1 2015 Earnings Report, Transcript and Summary

Good day and welcome to the Novatel Wireless Inc First Quarter Fiscal Year 2015 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask a question. [Operator Instructions]. Please note this event is being recorded. On today’s call we have Alex Mashinsky, Chief Executive Officer, Mike Newman, Chief Financial Officer, Slim Souissi, President and Chief Operating Officer and Michael Sklansky Vice President of Investor Relations. I’d now like to turn the conference over to Mr. Michael Sklansky. Please go ahead.

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 Investor 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 expectations, please refer to the Risk Factors described in our Form 10-K, 10-Q and other SEC filings, which are available on our website. Now I would like to turn the call over to Mike Newman, Chief Financial Officer of Novatel Wireless.

Thanks Michael and thanks to everyone for joining us on this call to discuss another successful quarter for Novatel Wireless. Today, we announced that we met all of our guidance metrics for the first quarter, growing revenue substantially and also increasing profitability. I believe this quarterly achievement is particularly significant, because we successfully executed on the quarter while simultaneously working to close our acquisition of Feeney Wireless and immediately accretive acquisition that also double the size our IoT business. Just a few quarters ago, it would have seemed impossible that we could grow revenues on a year-over-year basis while continuing to improve gross margins with positive adjusted EBITDA all while also acquiring another growing EBITDA positive IoT business for an attractive purchase pricing structure. Novatel Wireless is a dramatically change company from the organization that I joined in September and all of our employees have contributed to that turnaround. Now for the details of our strong first quarter. Total revenue in the first quarter of 2015 grew 10.8% from the first quarter of 2014 to $53.5 million consistent with our guidance for the quarter. Year-over-year revenue growth was driven by revenue from our mobile computing products, which grew 23.1% to $44.6 million in the first quarter of 2015 compared to Q1 a year ago. This puts us firmly on the path toward achieving our stated objective of growing mobile computing revenue by more than 20% throughout 2015. Mobile computing revenue in the quarter was led by continued strong sales of our MiFi 6620L and our MiFi 5510. Revenue from our M2M products with $8.9 million in the first quarter of 2015, an increase of 7.1% sequentially from the fourth quarter of 2014 as we continue to grow our M2M business. When you look at M2M revenue in Q1 a year ago, please note that quarter included some last time buys for discontinued products, so it’s not apples-to-apples comparison. We continue to expect double-digit organic growth and M2M revenue in 2015. Also since the close of acquisition of Feeney Wireless on March 27, we recorded revenue from Feeney Wireless sales on our books for the four days from March 28 to March 31, which was approximately $300,000 of revenue. Non-GAAP gross margin increased across all of our product sets in the first quarter of 2015 with overall non-GAAP gross margin of 24.8% compared to just 21% in Q1 a year ago. Non-GAAP gross margin for mobile computing products increased to 24.5% in Q1 of 2015, compared to just 20.5% in Q1 a year ago. And non-GAAP gross margin for M2M products increased 26.2% in Q1 of 2015, compared to 22.2% in Q1 a year ago. The improvement in non-GAAP gross margin combined with year-over-year increasing total revenue resulted in an increase in gross profit of 31.2% to $13.3 million in the first quarter of 2015, compared to $10.1 million in Q1 of 2014. We are very clearly seeing the results of our many initiatives to drive gross margins to improve our overall profitability and we remain on-track to sequentially increased gross margins throughout 2015 led by improved M2M product mix. Our operating expenses in the first quarter were also in line with our expectations and reflected the completion of our cost rationalization activities in 2014 as well as our renewed investment in 2015 for our future. Non-GAAP operating expenses were down 19.7% to 13.8 million in the first quarter of 2015, compared to $17.2 million in Q1 a year ago. And as expected non-GAAP operating expenses increased by $1.1 million sequentially in Q1 compared to the fourth quarter of 2014 to support our 2015 growth initiatives. We expect to see revenue growth stimulated by Research & Development in sales investments starting in the second quarter and then ramping through continued product releases in the second half of the year. As a result of our strong revenue performance increased non-GAAP gross margins and continued expense management. Our adjusted EBITDA was positive $600,000 in the first quarter of 2015, compared to negative $5.2 million in Q1 a year ago. For a year-over-year increase of approximately $5.8 million in adjusted EBITDA. In the first quarter of 2015, our non-GAAP net loss improved by $6.5 million to approximately $600,000 or a penny net loss per share compared to $7.1 million or $0.21 net loss per share in Q1 last year. Let me pause for a moment to discuss our non-GAAP financial results. Historically, but we discuss our non-GAAP P&L, we attended to have a lot of new moving pieces. I’m pleased to report that 2014 we work through most of the transitional items that were part of our corporate turnaround and we should have significantly less in noise in our 2015 non-GAAP financials. We completed an acquisition in Q1 and we anticipate further M&A activity in 2015, which we’ll resulted some very typical M&A related non-GAAP adjustments. But the non-GAAP adjustments related to our corporate turnaround are mostly behind us now. In the first quarter of 2015 in our non-GAAP financials. We excluded share-based compensation expense of approximately $800,000 as well as $5.5 million of accruals related to an all employee retention bonus plan adopted during 2014 as part of the company’s turnaround efforts. Note that the full payout for this retention bonus plan has now been accrued. So going forward, you will not see any increased accruals for. Also in Q1, we reversed approximately $200,000 of revenue charges that have previously been accrued, but now or not anticipated to be incurred. With respect to acquisitions, we excluded amortization of intangibles related acquisitions of approximately $200,000 and acquisition related charges for Feeney Wireless of $900,000. Including estimated continued are now and other acquisition related payments adjustments to inventory valuation based on the fair value of finished goods and professional fees and costs to perform due diligence and other acquisition-related procedures. Now we’ll move on to the balance sheet at year-end. We ended the first quarter, with cash, cash equivalents of $9.4 million compared to $17.9 million at year-end. The decrease in cash was largely driven by the purchase of Feeney Wireless with other costs and expenses related to acquisition as well as back and weighted sales linearity in Q1 that would have resulted and an increase in accounts receivable in the first quarter of $5.9 million excluding Feeney Wireless receivable. Last quarter, we highlighted a strategic increased in our inventory of $9.7 million, which was intended position us to reduce shipping costs and improved gross margins. While also enabling us to more timely need customer expectations for product deliveries. That initiative has been largely successful both internally and from a customer facing standpoint. This quarter excluding Feeney Wireless inventory would decrease slightly by $1.5 million with accounts payable decreasing by $3.8 million as we paid for the remainder of the Q4 inventory build-up. Finally, on our share count. Our fully diluted weighted average shares outstanding decreased to 46.3 million shares in Q1, compared to 50.1 million shares in Q4. This decrease resulted from the company generating and non-GAAP net loss in the first quarter after generating non-GAAP net income in Q4. This net potentially dilutive warrants and employee equity brands that have billion included in our fully diluted share count in Q4, we’re not included in our fully diluted share count in the first quarter just completed, because of their anti-dilutive effect on the net loss. So now I’d like to briefly discuss our second quarter guidance. We anticipate continued strength in our mobile computing products particularly our MiFi 6620L as well as continued improvements on our top-line performance for M2M products both organically and the Feeney Wireless. This combines for a second quarter revenue guidance range of $62 million to $70 million. We also anticipate continuing to improved non-GAAP gross margins across all product accept. In particular with M2M gross margins historically being higher than mobile computing gross margin, and now with the addition of Feeney wireless and its M2 M revenues we are guiding to second quarter non-GAAP gross margin of 24.5% to 26.5%. On the expense side we added over 120 wireless employees and contractors in Q1 along with our own Novatel wireless growth of approximately 20 heads. So non-GAAP operating expenses will necessarily increase consistent with our larger organization. But this isn't just about Feeney wireless and acquisition related roles. We continue to develop programs and infrastructure to support all of our growth initiatives. As a result we anticipate Q2 non-GAAP operating expenses to increase to $16.5 million to $17.5 million range. We once again also expect to achieve positive adjusted EBITDA in the second quarter with a guidance range of one million dollars to two point five million dollars based on our anticipated increased revenues and increased non-GAAP gross margin, partially offset by our ongoing investments in the business. We also anticipate second quarter non-GAAP earnings per share in a range of negative $0.01 to positive $0.02 based on approximately 59 million weighted average shares outstanding in Q2.This is a meaningful increase in weighted average shares outstanding from Q1 and it is driven primarily by three factors. First, since the midpoint of our guidance range for Q2 is for profit EPS, we anticipate that we will once again include potentially diluted warrants and employee equity grants in our share count in Q2 and we expect this to total approximately 5.5 million shares. Second, the shares issued upon HC2's exercise of approximately 3.8 million warrants towards the end of Q1 will now be outstanding for the full quarter in Q2. And third, a stock payment of $15 million for part of the purchase price for Feeney wireless is due to be paid in early 2016, and under applicable accounting rules the approximately 3.2 million shares insurable for this portion of the acquisition price are also included in our weighted average share count. I remain excited about our future at Novatel wireless. For 2015 and beyond as we plan to continue leveraging our technology and the successes we've achieved to date, in 2014 we restored the company to profitability. As we plan for the remainder of 2015, we expect to grow revenues and gross margins on both a sequential basis and a year-over-year basis in each quarter of the rest of the year. And then via combination of organic growth and further M&A activity we expect to enter 2016 with our overall end-to-end revenues more closely aligned with the volumes of our mobile computing revenues. We believe we can continue to execute across all fronts with our dedicated motivated world class employees leveraging our innovative technology and powerful relationships with our major partners, suppliers and customers. Now I'll turn the call over to Alex to provide more color on our business strategy and initiatives.

Thank you Michael, and thank you to the Novatel and Feeney teams who have delivered again on this amazing quarter. Our integration of Feeney is going well. We've obviously as I mentioned before, doubled our IoT revenues through this accusation but Feeney continues to grow faster than even the Novatel IoT platform. And we've already initiated a cost savings that resulted in about 20% reduction in the cost of the Feeney products. We have many new initiatives that are kicking in and we'll be seeing our contribution to both margins and top revenue line in the second half of the year and we're very excited about all of these and will continue reporting on them in our quarterly results. I want to reiterate that we are on track to finish the year with a run rate of $400 million in revenue, as with gross margins of about 30%. And we're doing everything we can to do both acquisitions and organic growth that are in the best interest of the business. We're not just doing it to achieve these goals. At the same time we continue to attract great talent. We've added over 20 employees including our new EVP of sales and marketing John Carney who comes to the company from Google. Before that he was with Sprint and T-Mobile which again brings amazing expertise and capabilities to our senior team. So now we have over 400 people who are dedicated to IOT solutions and dedicated to delivering our customers with solutions that are available only from the Novatel Wireless. We have several new products that are going to be launched in the second half of the year and we are very excited about those and I'm actually holding one of them in my hand and we hope to start, be able to talk about them in the third quarter and show them in the fourth quarter. By the end of June, we will also announce three new products with three North American carriers and these are again, I know we've talked about some announcements in the last call but I can assure that they're coming and we'll be presenting these products in press releases over the next several weeks so stay tuned to that. Let me open it up to questions of this point.

Thank you. [Operator Instructions] Our first question comes from Mr. Siddharth Sinha with Canaccord Genuity. Please go ahead.

Just on the M2M business, if I look at your Q1 results 8.9 million with about 300,000 from Feeney seem to be organic business is been a little weak the last three or four quarters. I mean could you elaborate on that is that just increased competition in your core verticals or shot of deployments I mean what if causing this weakness given that you reiterated your double your double digit organic growth guidance?

I think we've guided several times that most of our IOT growth is going to come in the second half of the year. That's just has to do with the timing of deployment of our largest customers. So we think these numbers are still with them the guidance that we provided. With Feeney I think you'll start seeing higher numbers every quarter but the Novatel part of it you'll see the acceleration only in the second half of this year.

Okay. Thank you. And then just given that you had some time to look at Feeney wireless could you share what this business did in 2014 I mean what's the growth rate given you've got to 38 million for 2015. How should we dig down the 70 between hardware and recurring revenue in how much of Feeney I guess baked into the Q2 guidance?

So I’ll answer that, this is Mike. So in terms of our expectations for Feeney wireless, we do anticipate that they'll do 38 million in revenue this year with the $3 million of EBITDA that we discussed last time we spoke which I think was a little over a month ago, after we did the acquisition. In terms of their breakdown and guidance we have included our expectations for Feeney wireless in our Q2 guidance just like at this point we're going to be including our expectation for Feeney wireless and any other guidance or results that we provide. At this point we don't plan to break out Feeney wireless as revenues in more discrete detail than we do our own which is primarily in two buckets of M2M and mobile computing and obviously Feeney wireless revenues are going to be going to M2M revenues principally.

Okay, thanks. And then switching gears, Alex you’ve announced the MiFi labs engineering services business this quarter. Could you share your thought on how do you size this business I mean how big this could be for you given that you carrier certification and expensive business and they aren’t too many fully certified independent lab in U.S. like the ones that you have.

Sure. So we kind of indicated that we were expecting this thing to ramp to $5 million to $10 million. It's obviously going to take some time to ramp to that level but it should normalize around between $5 million and $10 million in annual revenues. We've already signed up our first few customers and just the question of when they're going to get it and start using the services in the lab. So I think again we will give more color on that in the second half of the year when we have enough of them to kind of make it have any Impact on our overall numbers.

Just one last I mean I get back in the queue. Mike, given the cash in hand is under $10 million, do you think you have enough to run the business at this point, or do you foresee the need to raise cash I guess?

So in terms of running the business on a day-to-day basis we do anticipate that we have enough cash. You've seen the cash balance decline as I mentioned principally because we acquired Feeney wireless and some of the costs and expenses associated with that. But we at Novatel we already, had already achieved standalone EBITDA positive results and expect to continue to achieve increasing EBITDA positive results. When you combine that with the fact that Feeney is also EBITDA positive, and we expect to be in position to grow cash. I don't expect cash to decrease. I think we've got ample cash to fund business. In terms of whether we would need to get any additional cash that would be largely driven by the timing and needs on the M&A front.

The next question comes from Bryan Prohm with Cowen & Co; please go ahead.

I have a couple questions for follow up and some of these question is already -- so the revenue growth outlook is pretty impressive in any case, double digits, but it's over 30% of the high end of the range and I know it sounds like some of your newer and native end time products, you're still waiting for customers to finish testing integration deployments unlike and it sounds pretty back half weighted, can you break out the drivers here on the revenue range in a bit more detail without getting into the specifics from around Feeney revenue? Are you expecting sequential growth in the mobile computing business? Is the product cycle that strong at the carriers that have -- the DLP carriers that had adopted the 6620 such that revenue is going to continue to trend higher, because I recall and you alluded to Alex that there was another tier 1 carrier that we've been waiting to come in on supporting that product. But I haven't seen anything specific and I am wanting of that sort of baked into guidance.

Let me just jump in and then Mike can give you more color on that. We do have -- we are restricted from announcing these things until the carrier is actually launched. And their launch plans are directly correlated to what they do both from a marketing standpoint as well as other initiatives. The delays are not because of us being late or anything like that. So all these products are we talking about are accretive, meaning they both have higher gross margin and they're obviously incremental sales to what we're already doing. That's why we are confident in our guidance and we're adding these. The announcements will be coming in next few weeks and you will see. It's not just the 6620. As I mentioned before these are the ones we're announcing, the three new products with three different carriers. So Mike, if you want to add to that.

When we look at our Q1 outlook, I think that when you're trying to slice and dice between mobile computing in the M2M, most of the growth we actually see in Q2 on a sequential basis is going to be on the M2M side. It's a combination of having Feeney Wireless for a full quarter, but also the growth in our own M2M products. As Alex was discussing earlier we think we're going to have something start to kick in and we're going to see some very-very meaningful growth in M2M which is going to drive the overall growth rate in Q2 as compared to Q1. I think what would move us up and down from a high end and the low end if the mobile computing side. I think I generally look at Q2 mobile computing as flattish from Q1 with upside based on the product launches and timing of things that Alex was describing. So I guess the core of that growth is going to be the M2M but the fluctuation within the range is going to be mobile computing.

[Operator Instructions] The next question comes from Kevin Dede with H.C. Wainwright; please go ahead.

Michael just a couple of housekeeping things, first on the share count. So looking at 46 and then 5.5 from 1 and 8 from HC2 and 3 from the Feeney deal, I guess over 60. And I’m just kind of wondering maybe I misunderstood something?

Yes I think you’ve got it all too much adding in there. So let me walk through it.

I apologize for my hearing Michael.

Not a problem. So we were add about we were at 463 in Q4. So you would add to that HC2 exercised about 3.8 million warrants at the very tail end of Q1. So you would add that to the share count, the 3.8 million, because they’ll be outstanding for the whole quarter in Q2 or just a couple days in Q1. Also in order to reduce HC2 to early exercise those warrants for cash we issued HC2 1.6 million new warrants with the strike price of 550 and we expect those to be included in our fully diluted share count that 1.6. I mentioned during my prepared remarks that we owe $50 million stock payment for the acquisition of Feeney Wireless and less than a year. And that should replay to about 3.2 million shares so you need to add that in as well. And then on top of that you’d be adding in the…

Dilutive warrants to 55.

Dilutive warrants, the diluted employee options and one and that’s what makes a difference. To get you to about 59 million.

Alright, so it was my HC2 number that was, I messed up, sorry about that. Would you mind going back and looking at the second quarter last year. Could you give us a gross margin by segment for that quarter, is that’s the one quarter that I’m messing?

Okay. You have to give me a second for that.

Yes no problem. No rush on it, I mean if we talk later that be fine too. I just want I was hoping and see that just to pull out my data. And from a strategic perspective and I know Bryan sort of touched on this a little bit and your caller was thoughtful. But I was hoping you could just sort of lose a day your strategic thinking on mobile computing. I know that it’s difficult to look out pretty far especially as we get further away from a new product introduction and this was no part of what Alex commented on the fourth quarter call. I’m just kind of wondering if you’re looking at strategy there any differently now that the emphasis appears to be more on IoT. Or whether or not you still think you will to believe extra life expectancy into past products and what have you seen and I know there are announcements coming. But what other things of influenced your thinking. I’m just kind of looking at it from the sort of on a 20,000 foot perspective versus the second quarter color perspective?

Sure. So thanks Kevin. We actually our strategy isn’t change at all. I mean, I think we mentioned before that we will find ways to extend the life of products that may have come to end of life inside the carriers and we’ve done that extremely successfully as Michael stated before Alasta the 5510 product continues to sell in large volume in this quarter. And we expect many orders for the second quarter and probably into the third quarter. So these are examples of extending life of existing product. Our level 14 which is another product is also continuing to sell in volume. So we continue to find the new applications a new verticals for these products and we continue to develop new products my five products that are applied to a variety of vertical, we announced partnership with [indiscernible] into the educational market. We are now several other partnerships, we just launched a program with Uber and Houston. So we’re doing a lot of different things that are all using the MiFi product in different articles. We also as I mentioned these launches, some of these launches with North American carriers we are using these products for variety of applications Finney also found already several customers who are going to use these products for both industrial as well as commercial applications. So from a guidance standpoint, I think we're very confident that the volumes, overall volumes of MiFi products are going to continue selling. And as we guided for at least 20% growth in the MiFi segment, we're pretty confident that we'll be able to achieve those numbers.

Okay, Alex. Thank you. You mentioned during your commentary Alex that you will be able to reduce some cost at Feeney. I guess I was under the understanding that you really hadn't expected to do much integration work there, you expected to leave Feeney source supply pretty much untouched. Can you add some color on number one: on how you been able to extract cost from Feeny? And then number two: any early indications, you did mention some industrial commercial sales here or the MiFi product at Feeney. But what are other initial cost selling opportunities have you been able to conjure up and is it still fair for us to look at that sort of that addition of Feeney is more of a one plus one is two verses one plus one is three.

Yes. So that's a good question, we buy close to $100 million a year worth of components. Feeney buys about 10 million to 15 million, right. So we have a dramatically higher purchasing power and all we've done is basically leverage that with the vendors that they already do business with. So this was not because we reengineer the product it was just basically applying volume discounts to stuff we already do. And we Feeney, historically done a great job but going after the small and medium size accounts and now with Novatel behind them they can actually go and bid for a much larger project because these larger companies can basically relay on them to be around, because Novatel’s behind the product behind the service and everything else. So when we talking about acceleration and everything else it's because Feeney is doing a better job with their own resources it’s not because we're doing very complex integration between the two companies. So we in fact are supplier in Feeney, if you think about that way. And that's how we plan to continue operating the two companies.

Okay.

This is Michael. Just wanted to answer your question from earlier, you asked about gross margins in Q2 of last year. I'm going tell you what they are these are in fact the actual numbers, bear in mind that this was the bottom of the bottom, this was Alex joined a CEO at the end of Q2 and I came on Q3 a result of what are about to describe. Mobile computing gross margins in Q2 were 11.9% and M2M gross margins in Q2 of last year were 8.2% for a combined gross margin of 11% in Q2 of last year. Now there were a lot of reserves taken for absolute inventory and other things but that's what the gross margins were.

Yes. Thanks. And that shows where you where you’ve come from and kind of what I wanted to be on that he had to talk about next quarter.

And we’re not done yet.

No-no of course not, the target's 30 you've got some work to do. No doubt about it. So Michael, I have your attention, would you mind I think I was wondering if you could offer any insight on that 38 million that you expect that Feeney is there any way you can quantify the recurring portion of it.

That might be something that we'll consider talking about down the road in terms of their current portion and as we stimulate around CMS business our current portion. But as I said at this point we're going to sort of restrict to M2M and [Indiscernible] I can't say they have 250,000 subscribers which we've essentially picked up on the acquisition.

Right-right. Okay, yes. I did catch that I just wasn’t sure there was anything else you might want to talk to. So, with regard to the labs, Alex I know that you're working on certification or applicability to every North American carrier. I'm just kind of wondering where you are with regard to being able to fit all of those accreditation that someone who is able to pass their equipment through your lab. And if you're not applicable to all, when do you expect to be there?

We definitely need to add some equipment and some certification capabilities and we're working on that. But I think customers are viewing this more as a one-stop shop where they can come in and get help with reference design, with lab services, with any kind of any rework that they may need. So it's a full solution were no matter what piece of the puzzle they need, anywhere from just a simple testing all the way to a full product design. We can help them with our process. And when we are announcing, we are going to announce some of these customers, you're going to be surprised that what kind of companies are coming into my file labs because you would not think that they are a natural customer. Again, we opened up our engineering capabilities. A lot of companies that used to either not have enough capacity at home or didn't have necessarily the expertise at the higher end of the LTE modules, or LTE technology; those guys are elected to work with us instead of trying to do that at home.

Okay, fair enough. Last question with regard to Feeney, I know part of the reason that they hooked up with you is that they could leverage scale and reputation. I'm just wondering the use of your cash position, what you think you might need to invest there in order to help them scale this year. How are you looking to make sure that they have the resources necessary to get the targets that you hope they do.

Right so we're -- it's a great question -- obviously one thing you need to scale. We're not trying to milk as much cash out of them as possible. So we're balancing increase in headcount with actual projects that are coming in through the door. So what you'll see is again an increase in revenues but at the same time also some increase in cost. And as Michael guided before we plan to do all that while staying profitable. So we plan to continue achieving all of our goals. And it's just a delicate balance of moving all the levers just to the right position to make sure that you deliver the growth, the margin and the EBITDA that we guided to.

Okay, that's pretty much your standard response, I just wanted to see if maybe things had changed a little bit in light of the opportunities that you saw there. Thank you very much Alex for all the color, you too Michael for the arcane numbers. I apologize for putting you through that exercise, but hopes that's all I had.

[Operator Instructions] Our next question comes from Cobb Sadler with Catamount. Please go ahead.

I just had a question on the 400 million at the end of the year in that 30% gross margin. What would be the quarterly operating run rate that we should assume at that levels, once in the back end, kind of where it need to with an ongoing EPS number might look like given some sort of assumption in the end of this year -- as you might issue to get to the 400 million?

I think -- well I understand your question correctly, in terms of the quarterly run rate, we are essentially talking -- we've been talking about mobile computing growing 20% year-over-year and so you get roughly to that 400 million, you're going to be doing about 200 million in mobile computing and 200 million MKM. So you're looking at 50 million per quarter of each.

Got it, and then the OpEx level, you talked about 30% gross margin at 400 million, that's 120 million in gross profit. I just wonder what's sort of OpEx level we should apply to that number? I was wondering what sort of OpEx level we should only on annual run rate, the annual run rate or quarterly run rate whatever you want to get

Yes, and you're getting short of into an area that we haven't really got into before in terms of that OpEx run rate. So but we're talking about, let's just say, at the midpoint in Q2 we're looking at about 17 million. But the thing is where, I mean you can extrapolate that out on the assumption that will modestly continue to grow expenses to build things out. But within that you've got M&A as well which is what's going to get us there, 400 million run rate. And I would anticipate M&A as we bulk up, we’ll find cost synergies along the way as we bulk up to get to that $400 million run rate. So whether we're taking cost out of our side or their side or both, there's got to be synergistic opportunities as we bulk up in organic fashion.

Yes, got it. So, within the variable that's a good point and M&A variables are rate thought that, is kind of a something part of forecast at this point. So that kinds of bring to your next question, I think what you guys had talked about doing was -- you've done one excellent deal and then maybe one more by the end of Q2 and then maybe another one in the second half. Are you still think that that's possible or is it tune in the second half now, where do you think we stand there.

Look, we're not doing these deals again just so we could fulfill on promises, right. We’re doing these deals because they're creative to the company and they add capabilities that we need to deliver to customers and customers more and more asking for complete solutions versus just a piece of hardware or just a piece of software or just air time. So we have several targets that we're talking to and some of them are Feeney was a very easy transaction, we shook hands. We agreed on everything and we just went and closed the deal. At some others you have to stop and go stop and go. So we still plan to do something in the next quarter that may slip from Q2 to Q3 but we hope to do another transaction before the end of the year. But these things will only happen if there are accretive and are adding both increasing our gross margins and a strategic for what we're trying to do long term.

Got it. And in your final it was about the same status, it sounds like you got an opportunity, it’s probably tough to assign probabilities to each. But it sounds like your funnel, I am just asking, is your funnel is about the same size that they had then?

I would say the funnel is increasing because we continue to talk to more companies and we're engaging with so and as we come across opportunities with customers will go back into the finals. Okay, let's revisit this for that opportunity. And we may be willing to pay, because obviously a bit and then ask why the many times we can't do it because we don't have an immediate customer that we can say, okay here this customer will justify the purchase. So when we come across a customer we go back into the funnel and try to pull the right opportunity to be able to justify the purchase.

Okay, okay guys. What surprise me is the organic growth rate in your IoT business. It sounds like you got kind of inflation point that may sort of occur in Q2 but certainly in the second half and -- unrealized you preannounced any wins that you have but could you tell me maybe what verticals you think you're going to grow and the certainty that you have as relates to the deployment given new one on the to me one of the deals they're going deploy in the second half. Do you have a rollout timeframe as it relates to the one you might deploy the products and again just going back to the vertical which product would you like to see the growth within IoT?

Sure, so security continues to be a very strong vertical for us, you saw announcement with I Control, you're going to start seeing a few other security companies announcing either embedded or additional solutions from Novatel, Telematics is that continues to be a very strong vertical. So again we won several new accounts. We have several carriers who are now deploying or testing to deploy these solutions with us both in Europe as well as the Far East. So these are all new opportunities large scale opportunities that are going to be adding hundreds of thousands of units into the field and we can’t control the deployment cycles when we can -- we're ready to go and we're just waiting for customers to launch and announce these things but we’re less focused on telemetry but again Feeney brings a lot of telemetry customers into the fold and the skies product some of the other things that they’re doing are definitely winning market share in that area. So we were now starting to focus on the telemetry vertical as well. And then there is the other one-off opportunities that are, they have to upsized for us to be interesting. But I think the market is definitely growing and it’s a question of just being able to apply standard products into these different verticals.

What can customer, what can large customer be in revenue on a quarterly basis or annual basis? Let’s say security base or security vertical or another vertical. I mean we talking per quarter for really large customer 2 million to 5 million, 5 million to 7 million a quarter I mean where the large customer shake out?

Yes most of the customers in these verticals, I would say between $1 million and $3 million a quarter and these would be the large size customers. And some of them are large, but they don’t order every quarter, they’ll order twice a year or they’ll order when they have a large deployment their own and so on. So we have a variety of product, the good news is that we’re not just we’re diversifying the number of customers and I think we guided that by the end of the year we were hoping for our largest customer to be about 30% of our revenue. So down from about 60% of our revenues, right. So I guess to add many, many new mid-size and large customers and diversify and our presence and ability to deliver in many different articles.

Yes, got it. So your existing run rate of 8 million to 9 million, if you had one big customer looks like you can add 30% to your run rate per quarter as it probably was doing average amount of revenue to the 3 million bucks on 8 million to 9 million bucks you look like one customer when needle and you've understand, you’ve got a big funnel of customers?

We do, but as I mentioned not all of them order every quarter. So it’s not like so sometimes it’s a hit or miss and that’s why we're we’re kind of saying that we have an accumulation that’s going to hit in the second half and that’s part of why you’re not seeing this big jump on the Novatel IoT side which is what we expect to them. I mean, we guided to that several times. And so we’re being conservative on kind of when we’re going to see these things hit the revenue line.

But the second half, did you expect an inflection point, [indiscernible] conservative it sounds like in Q2, Q3, Q4 you [indiscernible]?

Yes, as Michael mentioned the Feeney side, Feeney has I think over a thousand customers. So they have but they’re much smaller. So they have much more stable run rate of revenues and even though it is growing faster than Novatel, it’s much more stable, because of the diversification. So we’re not seeing a lot of volatility on that side and we expect to report the numbers of Michael share it before and our guidance for Q2 without any surprises on the Feeney side.

Okay. And I would assume that Feeney’s opened the door – [indiscernible] someone it’s easier to -- door and seen that’s the case with Feeney and probably one of the reasons you acquired them?

Yes.

Got it. And then last question on the three new products with three different carriers. You don’t want to bring out the customers. But could tell us already I would imagine some of the customers have to be existing carrier customer right there it’s a North America, because you’re doing business with one major one you’ve done from business with AT&T and spread historically. So it would be tough for you to have three new products with three new carriers if some weren’t existing, is that correct?

But we, again I don’t want to spoil the surprise, but we have, these are, I hope there will be coming in the next week or the week after and we’ll have at least one week, but we’re hoping to have one for this earning calls, but again the customers had a delay. So we can’t announce them but it will happen when it happens and the good news again that these are new products and some of them were new carriers. So it both diversifies our product mix, it's a higher ASP and it's a higher margin product; so all these things are accretive to all the metrics that we're trying to achieve on.

These new products to be [indiscernible] in the mobile computing products, is that right?

It's a combination of both mobile computing and IoT products.

And then, the last question, on the hire of John Carney. Can you tell us -- I guess it's kind of [indiscernible]. You share that almost a year ago, then Michael was the next one hired and then now you have got John. What do you expect John to bring to the table? He is an ex-Google guy. He’ll probably be doing a lot of things in IoT, certainly [indiscernible] the carrier offering going on. And then he has also worked at Sprint, T-Mobile where you guys haven't done a lot of business, unfortunately. Now based on the last regime in the last in a couple years or so would expect tax companies, our legacy customers and what -- can you give me the background on what you think is going to be able to do for you?

Yes, I agree with that. I think John is an exceptional individual. He managed over 10,000 people in T-Mobile for example. He brings to manage capability and expertise into Novatel and its part of our efforts to become number one in the industry. I mean if we are planning to have several billion dollars in revenues, it will be important for us to bring in people who have already done that before right. So John, he's going to head all of our marketing effort, all of our sales efforts, and basically help us both recruit and scale the company and help us on strategy to position us to be number one. For me number one means that we will be activating more customers than anyone else in the IoT space. And that's what we're focused on, is putting the pieces together that will enable us to go solve customer problems and activate as many more devices than anyone else in the industry.

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