Hello, and welcome to Inseego Corp's Third Quarter 2022 Financial Results Conference Call. Please note that 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. I would like to turn the call over to Ashish Sharma, Chief Executive Officer. Please go ahead.

Thank you, operator and welcome to Inseego’s third quarter fiscal 2022 earnings call. As mentioned in previous calls, Inseego is currently in a transitional phase. We shifted from being a company solely focused on designing and manufacturing hotspots to one that leverages core technologies to provide a full suite of connectivity and mobility solutions to enterprises via our fixed wireless and SD-WAN products. Our results this quarter reflect this transition and we believe we are on the right path. We delivered a strong topline performance this quarter with revenue of $69.2 million. This level of activity met our expectations on revenue. In the quarter, we benefited from initial volume shipments of our next-generation hotspot, MiFi X PRO to Verizon in the US and Telstra in Australia. While this is an important validation of our products, as you may have heard us say that the stock carrier business carries lower gross margins, which is a contributor to why we saw our gross margin tick down this quarter. Our adjusted EBITDA was a loss of $2.5 million. EBITDA was lower than we anticipated due to the ongoing impact of higher supply chain costs and a non-cash adjustment to previously capitalized development expenses that elevated reported R&D in the quarter. The majority of these costs were nonrecurring in nature. So, we expect our gross margin to rebound and our reported R&D expenses to decline in short order. In Q3, our 5G revenue increased 22% year-over-year and now comprises 49% of total revenue. Our software solutions represented 21% of total revenue in Q3. Both of these metrics are important as we transition the company and move towards our financial targets. In Q3, we made good progress towards our most important goal of approaching cash flow breakeven by year-end. This progress was driven by the…

Thank you, Ashish. Let me now review the results of our third 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. Q3 revenue was $69.2 million, up 9% from the prior year and up 12% on a sequential basis. Our growth reflects higher-than-anticipated sales of our new MiFi X Pro product partially offset by anticipated declines in 4G products sold or carriers. Next-generation solutions, which are comprised of 5G devices and all of our cloud software assets increased 19% over Q3 fiscal 2021 and represented 70% of total revenue in this quarter as compared to 62% of the revenue in the year ago quarter. Third quarter IoT & Mobile Solutions revenue was $62.6 million, up 10.1% from the same period last year. Our growth was primarily driven by the launch of MiFi X Pro hotspot and further uptake of our solutions by enterprise customers, which Ashish mentioned, comprised over 13% of our revenue in Q3. Enterprise SaaS solutions revenue was $6.5 million, representing a slight decline on a sequential and year-over-year basis. Consolidated gross margin was 26.3% and down from 29.5% in Q2 and 28.2% in Q3 of last year. Gross margin for the IoT and mobile business was 23.4% and down from 24.4% in the prior year period and 27.3% in the prior quarter. The lower gross margin on a sequential basis was attributable to a significantly higher mix of hotspot revenue, which had lower contribution margin than we've seen of late due to higher component and distribution costs associated with the initial launch of our MiFi X Pro product. The…

Thanks, Bob. So, the key takeaway from our Q3 update is that we saw steady progress against our key initiatives and we continue to approach an inflection point in our business. As the availability of 5G enterprise FWA offerings become more prevalent, we are well-positioned to benefit from the growing demand for our products. In parallel, our cloud-based software solutions have a high attach rate providing us with a high-margin recurring revenue stream. This enterprise growth layered on top of our existing cost structure will ultimately transform Inseego into a high-growth company with sustained profitability and positive cash flow. Thank you all for your interest and support. We look forward to taking your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Lance Vitanza with Cowen & Company. Please go ahead.

Hi guys, thanks for taking the questions. I have kind of three areas that I was hoping that we could explore. The first on the revenue side, and that is in IoT services, revenue was up about $5 million to $6 million year-on-year. It's about a 10% increase. I'm just wondering if you could sort of help us break that down between increased hotspots versus software, 5G versus 4G price versus volume? Any of those -- any additional color on those categories would be helpful.

Lance, great talking to you. This is Ashish. So, let me take that. So, first, good question. I would say there are two components of increase year-over-year in that revenue. One is the new hotspot launch we've had with new customer in Telstra in Australia. I would say that's net new revenue. And then number two, I would say the continued growth in our enterprise FWA revenue, that's all bucketed in that IoT and mobile revenue. So I would say those were the two main components.

Are we seeing -- I guess, are you seeing any change with respect to the unit pricing on either side, is this -- I mean, should we just think of this as being pure increase in units that you're selling or is there a pricing component as well?

Well, let me -- why don't we step back a little bit, right? So Lance, since I took over the CEO earlier in the year, right, we did a comprehensive review of all the businesses. And we started to change our focus from changing every type of revenue growth to more of quality of revenue and cash flow generation, right? So in that respect, I would say our highest priority right now is to grow the enterprise FWA business, which was a component of this increase you're talking about. And yes, the margins there are significantly higher. I mean out of the gate, we're seeing 40-plus percent margins there. That's embedded in that revenue. Number two I would say, on the hotspot side, we're still focused on taking that revenue from key selected carrier partners. We're not chasing every career with low-margin business, because hotspot has to be quite a lower-margin business compared to the enterprise FWA business. And we did see an impact on our hard spot margins while the revenue increased this quarter, but we continue to see higher elevated supply chain cost, particularly given it was a brand-new product in the quarter from approval to launching it, we have to put everything on air. And so there are higher cost of shipping and they continue to be higher component costs. So I would say that's the mix you're dealing with as we generate more and more enterprise FWA revenue, you start to see that margin really shift towards much more than what we see today.

Okay. Great. And so that actually answers most of my gross margin questions, but just to sort of follow-up on the gross margin. You did call out the elevated supply chain cost in the quarter. And I'm just wondering, do you have any ability -- I would think that you would be able -- like a lot of companies that we cover, to go back and pass on some of those increased costs to your customers. And I'm wondering if that's -- is the market just too competitive for you to do that, or is it simply the nature of the -- the one-time nature of the cost increase that really didn't give you the time that you needed to go out and get these costs back, or how should we think about that going forward? Thanks.

Yes. Good question, Lance. So, on the enterprise product side, we have done all of that, right? We have increased the pricing, but it is still a smaller piece of our revenue, even though it grew to 13% of the quarterly revenue this time. But I would say on the hotspot side, it is a very competitive market even for our carrier customers, they have certain slots out there and there's pricing and elasticity of volume with pricing on those slots. So, it is super challenging for us to pass on those costs. Having said that, we've still surgically gone ahead, and in some cases, with the customer's consent, increase the pricing. But still, like I said, like there was just too much hotspot revenue this quarter that shifted the margins downwards given in general, the margins and hotspots are quite lower compared to the FWA enterprise margins.

Okay. Understood. And then lastly on the margin, I mean, it looks like -- so -- and thank you for the detailed explanation about these non-recurring cost items that came up. And it seems as though they came up very late in the quarter. I don't recall you identifying these when we spoke three months ago on the earnings call. So my question is, do you feel confident in your visibility as you sit here today with where we are as it relates to the fourth quarter and sort of the turnaround in margin, or should -- or do we have to worry that well, gee, there could be some other one-time items that come up that crop up over the next 60 days or so?

Yes, Lance, given that the launches of the new product, at least two big ones were executed this quarter, we are fairly confident that we're going to see improved margins next quarter. I don't see those type of headwinds hitting us again.

Okay. And then just shifting, if I could, last and then I'll wrap up, I promise. But on the balance sheet, I could -- I would imagine that given your relationship with Foxconn, that your minimum cash balance is quite low. But could you talk about that? I mean, how much -- I know you have the revolver, which is great. But is there sort of a minimum cash balance that we should expect that you will need to stay above just from the standpoint of operating the business? And then I know you have a couple of -- I know it's early, you have a couple of years, but could you talk also about, how you anticipate addressing the convertible note maturity in May of 2025, I believe it is? Thanks.

Yes, Lance. So let me give a high-level overview there, and then I'll ask Bob to chime in here. So three things I want to highlight, right? One, that we took out $20 million in cost this year as a run rate already. So that's one. Number two is the inventory, as I mentioned in the script, we were running pretty high on inventory, given the long lead times and trying to just really manage the supply chain cost by putting stuff on the boat and by trying to pre-buy with long lead times, right? So that's moderating now, and that's going to trend downwards. So it will leave pressure on spending more cash there. So that's number two. And number three, and the most important one is, we are seeing a lot of traction in our enterprise FWA business, with already this year, we have signed up hundreds of new customers with higher margin revenue. So a combination of those three, Bob's team has done a very, very detailed modeling. We're fairly confident with the cash and the revolver we've got. We don't plan to use the revolver for our cash needs. It's mostly for some working capital changes in the quarter, we go through here and there. But we'll be able to manage the business pretty tightly moving forward with those three different things I talked about. So Bob, if you have anything to add.

Yes. Hello, Lance. I mean, the only thing that I would add, and you've been with us, so you know this, the heavy investment in the two transitions. The transition of fixed wireless and having the correct portfolio position. And then the second transition from, call it, earlier or previous generation 4G and even previous generation 5G to new generation 5G and the hotspots we've already made those investments. So first, from the investment need, we feel really good that, of course, we're going to spend some money, but the heavy lift is behind us. The second, we wanted to avoid what some other companies found and they were stockouts and limited to what they could supply. So if anything, we intentionally inventoried up, so to speak, to that, we now have very, very good optics by SKU as to what the demand cycle should be. So we'll moderate those down. And then Ashish also mentioned, the cost -- and it wasn't -- when we talk about cost, it was really, we don't need the same investment. I do want for the audience to kind of focus on. This is not a company full of waste. Instead, it's a company who invested heavily in what they saw as a grade 5G opportunity. And as such, we now have that behind us, so we can reduce cost, not by cutting bone and muscle, but by just correctly sizing, since we do have all of those investments already in place. Hopefully, that helps, Lance. But feel free to ask a follow-up.

Thanks, guys. Appreciate it.

Thank you, Lance.

[Operator Instructions] The next question will come from Mike Latimore with Northland Capital. Please go ahead.

Hi. This is Aditya on behalf of Mike Latimore. Could you tell me, what was international as a percentage of revenue?

So, one thing I would say that traditionally, we have not broken out our international revenue as a percentage. This quarter, I would say, given the big Telstra launch, that was a significant part of the revenue.

Yes. So that's -- so it's -- I would say it's -- we don't give out that specific granular, but it was over 10%. So we took advantage of a good opportunity with Telstra, and we satisfied that.

All right. Thanks. And could you give some color on if you're seeing any hesitancy among the enterprise buyers given the macroeconomic concerns?

Good question. So from our perspective, 5G has quite a bit of momentum in the enterprise and SMB market, because if you look back to when the pandemic began, the broadband access to broadband and Internet became the lifeline for a lot of those businesses and customers -- and so from our perspective, we see this, as I mentioned in the previous call, we see this as an essential services that every enterprise, every employee of the enterprise needs to have. And 5G actually gives them a totally untethered capability based on location, irrespective of the location of where the employee service, so we're not seeing any slowdown from the enterprises on evaluating and then continuing to deploy 5G.

All right. Thanks. That’s helpful. Thank you.

Thank you, Aditya.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Ashish Sharmafor any closing remarks. Actually, sir, it seems that we actually have another questioner that just came through. And that will come from Mr. Scott Searles with ROTH Capital. Please go ahead.

Hey, good afternoon. Thanks for taking the questions. Ashish, I apologize, you probably covered this earlier in the call, but I just hopped on. Could you take us through the gross margin impact headwinds on that front, I'm sure from a component availability as well as some of the logistics issues. Can you take us through kind of where we are today and how you see that progressing over the next couple of quarters? And give us a quick update in terms of how the supply chain impact is looking right now?

Yeah. Hey, Scott, nice talking to you. Thanks for the question. So on the gross margin front, we had a couple of things happening this quarter. One, positive that our enterprise FWA business grew quite a bit at the end of this quarter, and it's now 13% of overall revenue, and that's all very high margin revenue, 40-plus percent margins on that. But we also had significant stocking orders from a couple of very big hotspot launches we did this quarter. And that kind of took the margin down, because the hotspots were facing higher supply chain costs, given it was a new launch in the quarter, we had to put everything on the air and the lead times were still a little bit long. So we had to order bunch at material well in advance. So those are a couple of things happening in the quarter. I would say, moving forward, Scott, irrespective of what you saw in the gross margin. One, we will definitely improve the gross margin next quarter. We don't see all of those things repeating again. And number two, we're quite a bit focused on free cash flow generation into Q1 and getting very close to cash flow breakeven this quarter. And that's really driven by three things I mentioned earlier. One is the growth in our enterprise FWA revenue, which is a great highlight. Number two is, we did take out over $20 million in cost from the business, given our change in focus from chasing more quality revenue versus the quantity of revenue. And that focus is all of about enterprise FWA. And third is that, this new hotspot got launched this quarter and so now we don't quite – you're not quite facing the same supply chain pressure that we did in last – this quarter. And so in Q4, that should come up. So that's kind of a quick summary of how we're thinking about, both the margin and the cash flow.

Perfect. And Ashish, if I could just follow up on the fixed wireless access comment, 13% is a big number in the – the September quarter. Could you calibrate us in terms of what it was in the June quarter? And then maybe help us understand the customers and the geographies that are ramping in full volume right now, what we should expect over the next couple of quarters for that product line?

Yeah, Scott. What I would say is that, geography is predominantly North America right now, because the couple of carriers here are the most aggressive one on enterprise FWA versus the carriers internationally. So most of it was coming from North America and I would say, just a ballpark that number is north of 50% what we saw in the previous quarter.

Great. Okay. Thanks so much, guys.

Thank you, Scott. End of Q&A:

So I'm going to just summarize now. 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. You may now disconnect.