Hello, and welcome to Inseego Corp.'s Fourth Quarter and Full Year 2017 Financial Results Conference Call. Please note that today's event is being recorded. [Operator Instructions]. On the call today are Dan Mondor, President and Chief Executive Officer; Steve Smith, Chief Financial Officer; Chris Lytle, Chief Strategy Officer and Executive Vice President of Enterprise SaaS solutions; and Ashish Sharma, Chief Marketing Officer and Executive Vice President of IoT and Mobile Solutions. During this call, non-GAAP financial measures will be discussed. A reconciliation to the most directly comparable GAAP financial measures is included in the earnings release, which is available on the Investors section of the company's website. An audio replay of this call will also be archived there. Please also be advised that today's discussion will contain forward-looking statements. These forward-looking statements are not historical facts, but rather are based on the company's current expectations and beliefs. 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. Please also refer to the cautionary note regarding forward-looking statements section contained in today's press release. I would now like to turn the call over to Dan Mondor, President and Chief Executive Officer of Inseego. Please go ahead.

Good afternoon, everyone, and thank you for joining today's call. I'll start my remarks on the continued progress of Inseego's transformation with the headlines. First, the company's turnaround strategy is progressing ahead of plan. The integration of all functional organizations has been completed, and Inseego 2.0 has been launched. Second, the outlook for 2018 is very positive and the market conditions have never been better. Third, Inseego's IoT and mobile solutions and enterprise SaaS solutions are well positioned in the market. We are at the forefront of the 5G curve. Inseego is in the right place with market-ready solutions, and we're making investments to bring new products to market in response to opportunities. Since joining as CEO last June, I have personally conducted hands-on reviews of all areas of the business, including each functional group, and I've traveled to all company locations multiple times, as have the members of the new management team. We know which assets are foundational to our long-term plans, and which assets are nonstrategic that we may choose to monetize. We have assessed market opportunities that passed my real, worth it and winnable tests. We've redefined the company with the primary purpose of focusing Inseego 2.0 on high-growth markets in 5G, smart IoT applications, consumer and industrial products and end-to-end cloud business intelligent solutions. Our strategic plan expands our served addressable market from $1.8 billion presently to approximately $3 billion in 2019, and to $4.5 billion in 2020, with 5G being a major driver. Product roadmaps and technology plans are in place that leverage our core technical competencies. We have developed a sourcing strategy of new device-to-cloud technologies, which integrate with our technology to create high-value solutions. We are driving our evaluation with revolutionary thinking to create new product categories. These are the growth engines for…

Thanks, Dan. Before I get into the results of the quarter, I want to elaborate on a couple of things. First, Dan mentioned the Inseego 2.0 both in the last conference call and in this one. We've gone through a comprehensive reorganization to redefine Inseego into IoT and mobile solutions under Ashish Sharma, and Enterprise SaaS Solutions under Chris Lytle. IoT and mobile includes MiFi and IoT businesses. New development work is targeting 5G, smart IoT devices and services to expand our industrial IoT footprint and home and industrial gateway routers. Enterprise SaaS Solutions is comprised of our Ctrack asset tracking and telematics and DMS businesses. We have put together comprehensive strategic plans and budgets highlighting each of the businesses. While we have not reported on the business this way in 2017, we will begin to -- begin providing additional transparency along these business lines in 2018. Accordingly, you will see new guidance begin to shape the dialogue going forward. We believe this is a major step forward in transparency. Second, the business process improvement or BPI project. We did a deep dive into the current state of the business and identified not only the required actions, but also the IT platform requirements first to fully integrate the company's back-office systems and processes. We're well underway with the planning and expect to launch this initiative in the second quarter. Ultimately, with streamlined processes and a fully integrated system, we should see tighter adherences to service level agreements, lower costs and stronger internal controls. Now onto the results of the quarter and the year. As a recap from last quarter's conference call, Q2 was a transitional quarter for Inseego. Q3 was as well. In Q4, we made real traction with customers and operational efficiency. As noted in our press release this…

Thanks, Steve. So thanks for your ongoing support of Inseego. The strategy behind Inseego 2.0 is to align our products and regional sales teams with real and permanent growth markets that are winnable, not moon shots. We have finished the reorganization and have a very efficient and effective structure to capture emerging market opportunities in mobile, IoT and SaaS business intelligence solutions, powered by the new wave of 5G technology. The fourth quarter is a strong indicator of real progress. Improving operating results and decreased leverage creates the flexibility to make investment in new products, such as 5G. In the early stages of a turnaround, you focus on making progress. And as you can see, we've come a long way, but there is lot more work to be done, and bumps on the road are inevitable. So it isn't whether you're going to hit some bumps, it's how you deal with them. Turnarounds don't happen overnight. It is no place for rookies, for the faint of heart. Anyone on the call that's done it, knows it. No 2 are alike, there is a common process. It takes detailed planning and unrelenting persistence to implement the plan. I believe that companies get into trouble because the managers can't or won't roll up their sleeves and dig deep. While the only way to get out of that trouble is to get new managers who can and will. Then create a new company culture and the set of values around it and make them permanent. This is what we're doing and improving as a result. We have recorded several important new wins, with more to come. It must be recognized that the new win with a larger service provider for global enterprise customer doesn't translate into immediate revenue. The design win or selection…

[Operator Instructions]. And our first question comes from Mike Walkley with Canaccord Genuity.

Great. Congratulations to you and your team hitting the milestones of profitability or operating income. Just for me, just kind of build the gap of the year, as you talk about little over $3 million in adjusted EBITDA for Q1 and to hit your run rate, exit the year that kind of takes it to a level more than a double from there. Can you kind of walk us through the cadence of the year? And how we should think about the milestones to get there? You made comments about well positioned for 5G, and certainly I was a week at Mobile World Congress, and it's definitely going to come quicker than we all expected a year ago. But it still seems like it'd be more of a 2019 opportunity for bigger volumes. So can you help us think about where hardware revenue and margins might go over the course of the year? And then where they could be once 5G fully ramps for you guys?

Yes, I'll give a framework, and then Steve can jump in with the comments. So there's a lot of things that were recently put in place that haven't seen their way through in the results. So firstly, we mentioned a lower cost contract manufacturing base. So the volume of products that we put through there is substantial, and the cost reductions that come from those are underlying part of most gross margin improvement. The other part is an increased software to hardware mix. Where you can -- as we discussed on Ctrack, there's a bit of reduction of the hardware content. Over time, we see that pretty well settling out at a level point. So in other words, going forward on a comparative basis, there's going to be higher software to hardware mix. And then as we're introducing new products, importantly in the IoT space, and we have a number that are going to be introduced in the second quarter, the gross margin pictures of those are dramatically better than let's say, the legacy MiFi business. And as we begin to introduce 5G product in some of these commercial launches this year, the gross margins for those are significantly higher. So in other words, as we work through the year, it's an upward ramp.

And just to build on that. Is that upward demand on just the overall gross margins with kind of stable revenue or is both revenue and gross margins grow as the year improves in terms of the business mix?

Yes. Well, we don't provide guidance on revenue on a long-term or year basis. But I think, as my comments earlier pointed, the first half is still in the foundational and a lot of corrective actions on getting things in place, beginning to see revenue on new wins. And we expect that acceleration to occur then in the second half.

Okay. Great. And then just on the overall cost structure, pro forma operating expenses, just a little bit over $15 million, so great job taking out all of those costs. With some investments for the new products kind of offsetting ongoing cost reductions, is this kind of a stable level we should be thinking about for modeling? Or do you see that slightly going up or down based on your plans?

Well, you can't correlate it. You said offsetting, so that in my mind is interpreted as a direct correlation. What we said was that we are increasing investments in new products, importantly, 5G and some IoT products. But you have to understand this is very important. We are redirecting our R&D -- current R&D resources to these investments. Okay? And as -- 1, 2. There is a sourcing strategy for a third-party technology that we're bringing into our solutions. So in other words, there isn't an R&D tag that comes with those. There isn't an R&D investment that comes with those on our part. So if you take those 2 things together, yes, we talked about an increased investment, but don't -- by no means should there be some impression that there is some wild upward swing. It actually as we foresee it based on those 2 factors, it's relatively modest. But wouldn't be possible if we hadn't take the cost out, that's the fundamentally important thing to understand that the flexibility that comes from having done that allows us to look at increase investment, but we're not going to be doing things crazy. There is a smart way to do it, number one and two, we are doing a big redirection of current R&D resources that frankly have the expertise in these new product categories, previously had not been directed and utilized as such.

Okay. And just in terms of ongoing -- you talked about some ongoing programs as part of Inseego 2.0. Is there more cost then to come out of the operating expense line and sales marketing and other G&A or is that run rate we're on now a pretty good to think about toward modeling?

Yes, we've made prior comments on this and we said that there was a business process improvement project that's underway. And Steve is leading that. And it was part of his remarks. So Steve you can.

Yes, I think what you'll end up seeing, Mike, is more movement amongst the lines. We will be beefing up our sales and marketing a bit as well as R&D resource. We are underway with the business process improvement project, which as I said, will ultimately lead to more better adherence to service level agreements, but also improve cost structure, and ultimately, more efficiencies.

Okay. Great. So I guess, the framework to think about adjusted EBIT of $7 million-plus exiting the year to hit that $30 million annual run rate would be gross margin improvements, steady OpEx and then some top line growth, that's kind of best combination I see to get there, is that a fair way to look at it?

Yes, that's a reasonable way to look at it.

We've mentioned previously, the business process improvement project. It's a longer cycle to get all the things we need to get in place to do that. But as you can picture, integration of disparate IT system, CRM/ERP systems and other back-office systems, there's a lot of efficiencies. So in other words, it's a little bit of a harder sledding to get to that point of getting that behind us. But once we do with these systems, there will be a big cost drop as a function of that. And so that's what we're working towards. And then we see that also as an improvement on the bottom line as well as, again, more headroom, if you will, for our investment strategy.

Okay. Last question for me and I'll pass it on. In terms of your targets exiting the year, is 5G meaningful at all then? Or is that really more of an investment to drive long-term growth into '19 and '20?

Yes. So great question. That's kind of the $64 question or the 5G question. So a little hard to predict. There is initial commercial launches this year. We will be participating in them. So we do expect to see revenue from 5G. I'm not going to really try to scope or size that. But as you can observe and I'm sure understand, naturally the acceleration begins at the end of the year and then goes into '19 and beyond. So the mission this year is to be part of commercial launches, to prove out the technology, to round out our portfolio not just broadband router products, but other mobile technologies, and then we go forward from there. So that's one thing. The second thing that you should know and you mentioned the activity at Mobile World Congress, we were engaged with a lot of discussions with a lot of operators as well as infrastructure network providers that are looking to partner on this technology. So we actually see the avenue for growth wider than it has been the prior swim lane for the company, both U.S. and internationally. And I think there's other avenues to the market in conjunction with some of the big network infrastructure providers.

Our next question comes from Jaeson Schmidt with Lake Street Capital Markets.

Just first off, I'm wondering if you're willing to disclose the number of subscribers you had in Q4, either on the Ctrack side or as a whole?

No, we're not going to disclose the total number of subscribers we have. It would be a combination of connected assets along with subscribers from DMS. We'll hold off on that one, Jason.

Yes, I think the other thing related, we're not just trying to be obstinate here. The thing related to that is that the shift of the business focus we have in Ctrack is towards fleet SMB and, obviously, aviation as you've heard. And because of the poor ARPU, cash drain and short contract cycles and consumer insurance we mentioned this previously, we are not pursuing new business in that area. Now that's really where you'd get the definition of subscriber from it. So I think, we're shifting to connected asset and away from articulation subscriber for those reasons. Fleet, aviation, SMB is connected assets. They're not individual subscribers. DMS is more of a subscriber count. So put those things together, you really don't have a clean way to talk about subscriber count. So that's where we're at. That's where we're going. We'll have to figure out in the future how we work connected assets counts, but there is a shift in our business direction.

Okay. That makes sense. And then I know in the past you've mentioned that these EBITDA targets for '18 early weren't dependent on any significant revenue growth, just curious if that remains the case.

Yes, that hasn't changed.

Okay. And then with the shift and focus to some of these IoT, mobile solutions. Just longer term, how are you thinking about the potential revenue breakdown? I'm certainly not talking about '18 or even '19, but where do you see kind of the revenue mix coming from as you look out kind of 3 years or beyond?

The way I would look at that is twofold. So firstly, what we've decided for the organizational purposes and quite frankly, line up how we're structured with the markets is IoT and mobile solutions, device appliances, Enterprise SaaS Solutions, cloud platforms, they work together to create an end-to-end solution. So the mobile and IoT solution is now a mix. What we do expect to see is a couple of things. So firstly, let's use the term the legacy MiFi business will on a relative basis not be as significant a portion. IoT and 5G will. So what we're going to see is a really dramatic, I think, change of mix in that business over time. And the goodness in that is, IoT use cases are a flexible point on gross margin. There is no predetermined price cost. It's what is the power and the value prop of the use case. So you're going to see a real change in mix of IoT and mobile away from, shall we say, legacy low-margin traditional MiFi to 5G and IoT. The exact numbers within that mix, we are not going to go into, but that's the trend.

[Operator Instructions]. Our next question comes from Mike Latimore with Northland Capital Markets.

This is Rishi [ph] for Mike Latimore. I have a couple of questions. So do you see any change in the competitive landscape for aviation vertical in 2018?

Well, yes, it's a great question. It's not that there aren't competitors. I think our position and what we're benefiting from, and certainly as we're seeing in our engagement level and pipeline growth is frankly, being in the right place at the right time with a first mover advantage on having an aviation solution. As I -- we mentioned in the call, we have 7 deployments. So as we go into competitive situations and they're all like that. We work through usual RFP types of submissions and then we go into the proof-of-concept, they call them technology bake-offs. What comes back time and time again is that we have a solution for aviation. It's not a repurposed SMB or repurposed fleet solution, it is an aviation solution. So that's one thing. And the second thing is, which is really, really important to know, is that we have strong reference account. I won't name names, but we have prior customers who are absolutely delighted with our solutions. More than happy to talk to their airline ground service equipment, brothers and sisters around the world to give us strong reference. So I think, you put it all together, this first mover advantage. And we put the time and effort in to create an aviation solution, not a coat of paint on an SMB or fleet of solution.

Okay. Great. And how is the activity in the UBI business? How much did it add in, like, 2017? And do you expect growth in FY '18?

I'm sorry, which business?

UBI, usage-based insurance.

Yes. So consumer and usage-based insurance. What's that tape? Dark, dogs and stars. What we looked at when assess the parts of the company, the asset business we're in is that there were parts of the business that in terms of acquiring new customers, acquiring new customers, consumer in UBI specifically by and large had a model, whereby the monthly ARPU was very low. The customer didn't want to pay for the hardware. So in other words, there was cash drain on us. And secondly, the duration of the contracts were in a neighborhood of two years, it was not exactly a very sticky value proposition. In other words, renewal rates weren't good. And about a 17-month payback period against the 24-month contract was uncertain renewal. So let me think about that for a minute. What do we like about that business? And what we decided we didn't like anything about that business. So the customers that we have that we served, that are beyond the payback period. Great, fine, we love them. We're going to continue to service and support them. New customer acquisition is just not a good value prop. So maybe it's for somebody, but it isn't for us.

All right. And just one last question. So I missed a couple of numbers actually, could you please repeat the non-GAAP gross margins for both hardware and SaaS in the fourth quarter?

Say that again.

Non-GAAP gross margins for hardware and SaaS, both the segments, in fourth quarter.

So non-GAAP, you're asking what was the non-GAAP gross margin in the fourth quarter for hardware?

For hardware and Saas.

Yes. Okay. So our non-GAAP gross margins for hardware was 16.8% in the fourth quarter.

Okay. And for the SaaS?

For SaaS, it was 74.6% in the fourth quarter.

This concludes our question-and-answer session as well as today's conference. We thank you for attending today's presentation. And at this time, you may disconnect your lines.