Hello, and welcome to Inseego Corp's Second Quarter 2022 Financial Results Conference Call. Please note today's event is being recorded. All participants today will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity for analysts to ask questions. [Operator Instructions] On the call today are Ashish Sharma, CEO, Bob Barbieri, Chief Financial Officer, and other members of the management team. 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 the 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. At this time, I would like to turn the call over to Ashish Sharma, CEO. Please go ahead.

Thank you, operator and welcome to Inseego’s second quarter fiscal 2022 earnings call. We had a solid quarter with revenue of $61.9 million, and an adjusted EBITDA loss of $1 million. Importantly, we saw our gross margin improved to 29.5% in Q2. This is a reflection of our long-standing focus on 5G products and improving our mix towards higher margin recurring revenue. From a business perspective, what we are most excited about is that, we started to see several enterprise customers convert 5G pilots into full-fledged large multi-location deployments. This progress within our enterprise business and our growing pipeline of opportunities are a few of the key things that underpin our confidence in a strong second half of this year. Before highlighting how our business is evolving, I want to touch on a few things. First is our drive to generate positive free cash flow. We remain disciplined with respect to investments in our business and anticipate improved operating leverage now that we have a number of key product certifications behind us. Further, between the growth in our higher-margin businesses and a keen eye on our costs, we can see Inseego approaching free cash flow breakeven by the end of this year. Second is the importance of the $50 million credit facility we just closed. This facility gives us ample capacity to fuel the growth we see later this year and into 2023. Bob will touch on both of these shortly. Lastly, we believe 2022 represents a positive inflection point in our business. For the last few years, we've discussed the promise of 5G and the impact it will have on end customers. While it has taken longer than we would like, we are finally starting to see that promise become a reality. Household from two perspectives, from our carrier…

Thank you, Ashish. Let me now review the results of our second quarter fiscal 2022. Please note that all metrics and comparisons made are non-GAAP on a pro forma basis, adjusting for the divestiture of Ctrack South Africa, which was completed in July 2021. Please refer to our earnings release for additional details on the GAAP to non-GAAP reconciliation. Q2 revenue was $61.9 million, up 6% from the prior year and up slightly on a sequential basis. Our growth reflects continued strong demand for our 5G solutions and increasing traction with enterprises, particularly offset by anticipated declines in 4G products sold directly to our carriers. Next-generation solutions, which are comprised of 5G devices and all of our cloud software assets increased 25% over Q2 fiscal 2021 and represented 66% of total revenue in this quarter as compared with 50% of revenue in the year ago quarter. Second quarter IoT & Mobile Solutions revenue was $55.2 million, up 7% from the same period last year. Similar to Q1, our growth was again driven by demand for our 5G mobile hotspots, further uptake of our solutions by enterprise customers and steady growth in our attached software revenue, which partially offset by declines in our 4G product sales. Enterprise SaaS solutions revenue was $6.7 million, which was relatively flat on a sequential and year-to-year basis. As noted last quarter, we're in the process of enhancing our software assets and integrating them into our 5G edge cloud. Consolidated gross margin was 29.5%, up from 27.3% in Q1 and 28% in Q2 of last year. Gross margin for IoT and mobile business was 27.4%, an increase of over 300 basis points from 23.9% in the prior period and 24% in the prior quarter. The gross margin improvement on both a sequential and year-over-year basis reflects…

As I hope you can see from our comments, the promise of 5G is becoming a reality, and we are uniquely positioned to capitalize on its rollout for years to come. We are focused on continuing to provide best-in-class solutions to our carrier partners and increasingly to enterprise customers through our 5G FWA and software solutions. We made continued progress, against our key initiatives in Q2 and with our key carrier partners now starting to turn their attention to 5G enterprise FWA, and the successful launch of our next generation of 5G products. We are primed for a strong second half of 2022. As more and more of our enterprise pipeline move towards purchase and deployment in the coming quarters, we expect to benefit from a high attach rate of software sales, which will ultimately help us to continue to improve margins and profitability and we generate positive cash flow. Inseego is at an inflection point, and we look forward to keeping you updated on our progress in future quarters. Before we move on to the Q&A, I'm very pleased to announce that Jeffrey Tuder has been elected Chairman of the Board. Jeff's extensive industry knowledge, combined with his unwavering integrity and expert judgment have been invaluable since he joined the Inseego Board in 2017. Jeff is the perfect choice for Chairman of the Board, and I'm confident that he can help lead the company into the future. Now let's go to Q&A.

We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Tore Svanberg with Stifel. Please proceed.

Yes. Thank you. And congratulations on the continuous progress here. Ashish, I know, it's hard to quantify, obviously, the second half, but you referenced a very strong second half. Can you put some numbers or certain metrics around that? And maybe as related to that, what would be the breakeven point that given the higher gross margin now?

Hey, Tore. Hope you're well. Good talking to you. And look, this is the business transformation that we've all been bidding for, right? And this quarter, you start to see us move to the next phase of the company where you could see clearly the margin bump we got with our new enterprise business that we've been working for quite some time to stand up. We've had the portfolio and the products are ready to go for quite some time. And now with the carriers push on the new 5G FWA plans, particularly targeted towards enterprises. You start to see those results come through. And that's the main driver along with the next-gen hotspot launches that's making us so optimistic about the second half of this year. So those are the two different engines that we did not have in the first half of the year. And that's what's changing here. I think your second question about at what levels we get to breakeven. I mean I would say, Tore, it's still a very early 5G after market, right? So, we've got a lot of customer traction. Enterprise customers are loving the product, but they're all individually still assessing and figuring out their own plans on how to roll out the deployment. We started to see some do it this quarter, and that shows in the results. So it's hard to pinpoint a fixed number, but directionally, what we see, what we saw this quarter. And if we still stay with that same pace, then we're very comfortable that come end of this year, we'll be getting very close to breakeven on the positive cash.

Very good. And as a follow-up, the IoT and mobile business, about $55 million. Can you give us a sense for the mix there now between both 4G versus 5G and also what the percentage is related to enterprise?

Yes. I would say, Tore, majority of the enterprise is on 5G. There's very small number in there for 4G. All of the enterprises, 5G and rest all of the revenue there is really hotspots. So I would say that the growth that we are seeing is in the right area, it is with 5G, and it is with FWA and the hard part and in this quarter has been pretty steady with what we've seen in the previous quarters.

Very good. Just one last question for Bob. Bob, the inventory, obviously, was up quite a bit. You had 98 days right now. And I was just hoping you could talk about that particular build. Is this in anticipation of the second half or is there anything else sort of other moving parts going on there?

I think there's a couple of things, Tore, and thank you. One is, certainly, we don't want to signal an anticipatory large ramp. Certainly, we can't wait for that to happen. But we've moved a lot of our shipping to kind of manage our cost stack back to ocean and so what that has done is kind of slowed the pace of the inventory coming in, but temporarily has raised the inventory balance, but we believe that cost trade-off is beneficial to our margins.

Great. Thank you, very much.

Thank you, Tore.

Our next question comes from Scott Searles with ROTH Capital. Please proceed.

Hey good afternoon. Thanks for taking my questions. Maybe to follow up on Tore's question, Ashish. In terms of the visibility and the outlook, is there anything that you could help us quantify in terms of what you're seeing that backlog or that pipeline in terms of the size, magnitude, number of customers, maybe the size of deals and particularly on the enterprise front. And then I had a couple of follow-ups.

Okay. Hey Scott, good talking to you. So a couple of data points I can provide, right. The size of the pipeline through the three different routes to markets you've got, I would say the size of the pipeline is like triple, quadruple since we last spoke, right? So we're on a very fast pace of getting products out to a lot of customers and engaging them in trials and pilots and starting to now convert them into full deployment. So that's one number. I would say that the pipeline is super strong. There's a lot of interest. And I would just say that the networks that we are seeing, right, the C-band network from Verizon and AT&T and then the mid-band network from T-Mobile are incredible. I mean, the performance is just simply incredible. So that gives us just great view into what's to come here in the second half of the year and then moving to next year. And I would say, look, the opportunity size could go from small units for trials to a couple of hundred units for pilots to a few thousand units all the way up to, I think I mentioned one notch customers got one force of 100,000 employees, right? So work from remote solution that could be pretty significant for us. So I think the pipeline consists of all different sizes of these customers. And I would just say another data point is we closed some initial customers in Q2 with very sizable opportunities where they're rolling out 5G FWA at thousands of their locations over the balance of this year.

Okay. Very helpful. And Ashish, if I could follow-up on that. Just in terms of the sales cycle there and deployment cycle. Could you help us, it sounds like things are accelerating, but is there a time line you put around that in terms of the digestion period now? Is it 90 days? Is it 180 days? Is it compressing then going forward?

Yes. I would say that the purchasing decision could be made anywhere from 30 days to several months. It really depends on the purpose of the rollouts and there are different purposes each customer has. But in general, I would say, on an average, the customers are going from pilots into full deployments between three to six months.

Okay. Great. And if I could, just on the financial front, Bob, any 10% customers in the quarter? I know you typically had big numbers from Verizon and T-Mobile. I'm wondering what the percentages were there? And on the OpEx front, R&D has come down. Is that the sustained level that we should be assuming, or is there a bit of an inflection? Because I know I think software capitalization has kind of bottomed out now at a lower level. I'm assuming that there are no changes on that front, or how should we be thinking about R&D going forward into the second half? Thanks.

Yes. Thanks, Scott. And first, let me answer the -- I'll just start with your first question. Certainly, we have the same two customers. And you mentioned, Verizon and T-Mobile, both over 10%. So not much different than what we've seen in the past. And those combined for generally over 50% and that's been kind of a similar pattern, so no unique change there. With respect to R&D, Yes, we've kind of managed I think in prior calls and when you've been with us personally, we talked about a significant reinvestment for the 5G opportunity. So we've done that. And then so our new R&D spend rate is kind of enhancing that. And you're looking at what I would consider the new normal. So we're not looking for any more inflections up. If anything, perhaps slight moderation down as we kind of digest what we've already done. So, anyway, that's kind of the look of the OpEx. I just want to add one thing. that's also consistent with what we previously spoke of that as the company grows, not a lot of new OpEx is required, so we could see that kind of driving the bottom line and the cash generation.

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

Thanks, Scott.

Our next question comes from Mike Walkley with Canaccord Genuity. Please proceed.

Thanks for taking my question. Good to see a little uptick on the gross margins with the mix. Just building on that, longer term, where do you see maybe fixed wireless as a mix relative to hotspots versus where it is today? And as that changes, where could gross margins trend to from the current business run rate?

Hey, Mike, this is Ashish. So let me take that. So obviously, we're just beginning with this, right? We've been climbed up for this for the last couple of years. We made the investments. We build the portfolio. We believe the size of the aftermarket is significantly larger. And I'm talking particularly enterprise market, not the consumer market. The FWA -- 5G FWA enterprise market is significantly larger than the market that we had access to before with the hotspots. So we believe, for us, as the market ramps up here, I mean, we just saw one large carrier pushing FWA hard. And then we got Verizon is coming back strong here with C-Band and the build-out they're doing and the plans they're coming out with. Then we have international markets still tracking a little bit behind, but they're all going to come online over the next, whatever, 12 months or so. So you start to see that FWA for us becomes a lot more meaningful. And it's not just the size of the market from a hardware perspective, it's the ability to sell a complete stack up there. We're selling cloud on the top of that. And then now we've got this 5G SD EDGE solution, which is a complete security and enterprise management solution on the top of cloud management. So we get that opportunity to sell a lot more layers of solution on enterprise. So for us, that's a great market, and it's not years out. It's starting to happen now. And we think over the next several quarters, it's going to starts to -- continues to steadily ramp up every quarter.

Great. Thanks. Just build on that, how do you view your competitors in that market and you have Cradlepoint who was bought by Ericsson going after some of the same enterprise you talked about Serwireless was just bottom they have a 5G so router and gateway business. So how do you view the competition? And what's the feedback on why you guys are differentiated and winning some early business?

Yeah. Great question, Mike. So first off, right, just by the virtue of a very sizable, very large market in the making here there would be a lot of competition, and that's great. It's good to have a sizable market where you can play in. I mean, a couple of different competitors you mentioned have slightly different focus than the focus we provide and the approach we provide to those customers. Our differentiation is one couple of things. One, you look at the best and -- we provide and build the best of the best of the modem in the industry, and we always have the latest 5G technology in the mix, right? At the most economical price point to those enterprises because we're not building the clunky old type of SD-WAN boxes with heavy Intel processors and all that. We don't do that. We build a very thin edge, which performs the best way. It gives you the access to the best pipe to the 5G networks. And on the top of that, the solutions I'm talking about, in particular, the 5G SDS solution, it's a major disruptor in the market because the economic value prop we are providing to the end customer with the ease of use is unparalleled in the market today. Nobody has a security and a distributed networking solution like that in the industry. That's our differentiation.

That's great. And last question for me. You touched on it earlier with T-Mobile on pricing. Can you just talk about the carriers and what you're seeing in terms of how they're going to price it to the enterprise and that timing of when it might help the market even take off faster?

Hey, Mike, that's already started, right? So in Q2, T-Mobile already released multiple very compelling business plans, and that's been the catalyst for the progress we started to see this quarter. Verizon has done the same. And then we're starting to see other carriers internationally and domestically, all work through those plans, which are directly tied to the mid-band or upper band rollout, right? So they need more spectrum to be able to put better compelling plans, and that's what they're really working towards. And like I said, early days, but look, the opportunity is significant. The performance of those networks on the mid-band is just incredible.

Okay. Thanks. One last one, I'll pass it on. Just any supply issues to worry about in the second half, or do you feel pretty good about – availability to meet your second-hand potential ramp?

No, issues, Mike. I mean, the thing I would highlight is we still continue to operate in – in an elevated cost supply chain cost environment. But – we've done a remarkable job. Our ops team has done a remarkable job managing the supplier, and that's the reasons a lot of our carrier customers love us, because we've always been there. We've had the product, and we've managed the supply chain really well going back to the beginning of the pandemic couple of years ago.

Great. Thanks for taking my questions.

Thank you, Mike.

[Operator Instructions] The next question comes from Mike Latimore with Northland Capital. Please proceed.

Hi. This is Aditya on behalf of Mike Latimore. Could you give some color on, if the inflation on the recessionary fuels are having any impact on your enterprise SaaS business?

Hey, Aditya, this is Ashish. Let me try to address that. So first off, I would say that, yes, we see the macroeconomic environment out there and a lot of fear of the inflation, and what happens to the broader economy. I would say that, we're really not seeing an impact of that on our business and perhaps the reason is look at the industries we are starting to serve now with the 5G have to go business. I talked about the education market. I talked about construction, health care, utilities, manufacturing, and you look at these industries we serve, these are all essential industries, right? So we're bringing a very disruptive economical land solution with complete security stack to 5G into those markets. So for these customers, this is a much better an economical way to deploy the WAN services or the broadband services. So to me, we're not seeing any impact of the macroeconomic environment on our business, or on our customer pipeline.

All right. Could you also tell me what the current headcount is? And what do you expect it to be by the end of the year.

I would say Aditya, the current headcount is -- we've got some offshore contractors and prominent headcount, but it's -- I would say it's in the range of a little north of 500 employees.

Do you expect that to increase by the end of this year?

No. No, we're managing our cost very well. And like Bob said earlier, we've got the team in place, and we've got our channels in place. We don't expect to increase that.

All right. All right. Fine. Thank you

Thank you.

At this time, we are showing no further questionnaires in the queue. And this concludes our question-and-answer session. I would now like to turn the conference back over to Ashish Sharma for any closing remarks.

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

The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.