Inseego Corp. (INSG) Earnings Call Transcript & Summary

All right. Thanks, everybody. I'm Lance Vitanza, Cowen's TMT analyst and I'm delighted to have Inseego here with us today. Thank you all for coming. And with me from Inseego is Ashish Sharma, it's a pleasure to have you, the CEO of the company; and then also with the us is Bob Barbieri. Bob it's good to see you as well. So we have a lot to talk about today, actually. And I thought I'd just sort of billboard the areas that I wanted to get to, and there's a lot of overlap, so we'll see how this all sort of shakes out. But I figured you could maybe start by giving a little bit of Inseego one-on-one. And then I thought we could kind of go through and talk about the channels, enterprise versus carrier and then maybe the impact of 5G versus 4G. Obviously, the software initiatives which are transforming the business. And then we could talk about the cost side, supply chain, which obviously is a big issue for people. And then we'll finish with balance sheet and liquidity. And then if there's any questions from the audience then we can get to that at the end. So if that sounds good, we'll jump right in?

Yes. Let's go.

Okay, great. Did you want to just open up with a couple of...

Well, first off, Lance, thanks for having us here. Great to be here and great to be back in person again after a long while. So just a quick overview on Inseego. We are a 5G company. We make 5G end-to-end solutions that includes mobile solutions and FWA solutions to allow enterprises' connectivity to 5G networks, and we build the best modem in the industry and in terms of connecting to a 5G network, and we will beat anybody in a live network environment while testing our products. So that's what we do. And we've got our FWA and mobile solutions all packaged up with multiple layers of software. And all of this is to enable multiple types of use cases for enterprise customers. Quick overview.

Great. And then just in terms of the current -- just the data points of revenue and EBITDA of the company?

Yes. So revenue levels right now, we are sort of -- we finished Q1 in the $61 million type of a range and we have a negative EBITDA, about negative $3 million or so.

Okay. All right. So before we get to enterprise, which as I understand is sort of where things are really exciting. I want to start by talking about the success that you've had on the carrier side. And the reason is because when I started covering the company, if I remember correctly, you had a couple of carrier customers, and that was up from one really a few years before that. And within a couple of -- within a short period of time, that had expanded nicely, and that seems to be the template for what you're doing now on the enterprise side. So I think it would be instructive. Could we talk a little bit about the carrier market and your success there?

Yes, absolutely, Lance. So our strategy is crystal clear in terms of going after the enterprise opportunity and carriers are a big part of that. So carriers are on route to market to get to the enterprise market, right, from a FWA -- 5G FWA perspective. And we used to sell hotspots to the carriers, and that was many years ago, we still do. We've now expanded our presence with carriers, not just in North America, we sell to all the large carriers here in North America. We've got carriers now in Middle East, in Europe, in Australia. So we've significantly expanded our carrier footprint, and that is also super vital for us to go after the enterprise opportunity because for carriers, that's a huge growth market.

So could you talk about that? So basically, the carriers were essentially the front end for you to get to the enterprise customer, and now you're going directly to the -- well, not directly, but now you're using channel partners to reach the enterprise customers en masse? Or how does that...

Yes, it's multiple routes to market. So we've got carriers. In some cases, they stock our solutions. In some cases, they are just a channel to the market from a lead gen perspective. They bring us a lot of leads to the [ end enterprise ] customers. And then we also have direct distribution and VAR channel built up in all of these regions to go directly engage with the enterprises. So multiple routes to market.

Okay. And then in terms of your more recent focus on the enterprise opportunity, I know you've talked about some pretty big TAM numbers and everybody likes to hear those big numbers. So I wanted to see if you could just sort of walk us through what you see is the opportunity and really why you're excited about it. Where we are in the process, how early or how late are we in this? What the sales funnel looks like? How many partners you're working with, et cetera? Just give us a feel for it.

Yes. So just stepping back, right? You looked at the TAM and SAM we played in many years ago with the hotspot market, right? We are playing in a premium hotspot segment where the market was attractive, technology was the best of the best, but the market size was relatively small, right, a few billion dollars of market TAM, right, at the time because majority of the market had gone to lower-end hotspot market. A lot of the carriers were nearly just focused on selling 4G data plans with kind of like with a small capacity dedicated -- their network capacity dedicated to data plans on the hotspots. The majority of the focus was on smartphones, right? Smartphones and smartphone packages and applications and all that, right? You fast forward that now with 5G, the carriers have a lot more capacity. They've got lot more spectrum. Mid-band is huge, like the amount of spectrum they have available is quite a bit more than combine all the 4G spectrum and then millimeter wave is obviously a lot more than the mid-band spectrum. That gives the carriers now so much capacity to be extremely disruptive in terms of the broadband WAN space, right? Now they could be the primary WAN connection as opposed to a backup WAN connection with 4G, right? That's where we've expanded our TAM and SAM significantly, right? We can now go after enterprise WAN applications, connectivity is one, beyond connectivity, you can go after security and networking applications. We can do that all in the 5G cloud. Beyond that, we can go after enterprise workflow applications that we can enable all on the 5G network compared to how they are done today, right? So it really expands the reach of what you can reach with 5G networks that you couldn't do with fiber and fixed technologies.

So 5G, clearly the future of where the company is going, but you still have a fairly large 4G platform that's still kind of rolling off that's kind of moderating the top line growth of the company. Is that right? Could you talk about how you see that rolling off over the -- or if rolling off is actually the right way to think about it, how the interplay between the sort of the slower growing maybe 4G piece and then the 5G piece, how that sort of looks over the next, call it, 12 to 24 months?

Yes. I mean that transition has been happening, right? Because last couple of years, we've introduced a couple of different generations of 5G hotspots, right? They're not as -- from a price perspective, they're not as cheap as the 4G technology is because there's so much more built into 5G, many more bands and all that. But over time, with more and more volumes of product shipped, 5G is going to get closer to where 4G is. And with that, like all of the market is going to move towards 5G. So that transition has been already happening. Remind you also in the 5G hotspots, we have the best 4G built-in as a backup in there. So that's -- it's not that 4G is going away, it's more of 4G only technology is now transitioning to a combined 5G plus 4G technology. And that's already been happening, and we've been taking that market because we've got those customers.

So then I might be mistaken on this, but my presumption had been that the price points in 5G, at least today, were considerably higher, like more than double the price points of the 4G gear. The first question is, is that accurate? The second question is, are you saying that actually it's necessarily the case that in order to get the volume growth that we're sort of expecting that we're going to need to see that price point kind of "come down to the 4G price points that we have today?"

Yes, it's a chicken and an egg. The more chipsets you ship, the more units you ship, the pricing comes down and that's what's happening now with 5G embedded into so many smartphones. The volumes are getting there. So that's driving the price points down. Yes, it is more expensive than 4G today but it is also -- the pricing is going down drastically. It has gone down drastically over the last couple of years, and it will continue to go down over the next 1 or 2 years.

So then when we think about the opportunity in 5G, we should think about it as a volume opportunity, but not necessarily a margin opportunity. Is that fair? Or is there a margin opportunity that comes just from the raw scale?

No. I mean, I would say it differently, right? Like you've got different market segments, right? You've got, I would say, hotspot is one market segment. FWA consumer is another market segment. FWA enterprise is a totally different market segment. So depending on the segments you play in, the margin profile is really driven by those segments, not really by 4G versus 5G.

Okay. So then from that perspective, where should investors look to see the margin improvement over the next -- just in general, the next 2, 3 years? Is it really going to be more from expanding into higher-margin products like software and so forth? Or will it be scaling the business? Or other areas?

Yes, a couple of things. So one, it's absolutely right, like doing more software, which we now have the capability to do on the enterprise FWA products because the enterprises are not just looking to buy a modem or a CPE device. They look for much more integrated software that they can utilize, security, networking, workflow applications, like they look to do more things. And we've got an opportunity to sell a lot more software to them. And number two, obviously, the 5G FWA itself as a connectivity technology the enterprises will pay more, better margins on a high-quality and secure product. So both of those things, the FWA in the enterprise, plus the different layers of software that we can sell on would improve our margin profile quite a bit.

All right. And so just to sort of double click on the software piece. Is that something where -- do you view that an add-on to your existing relationships? Or are you using that as sort of the tip of the spear to broaden the, either the verticals or just the raw customer count that you have? How should we think about that? I mean is it -- how profitable is it? It sounds like it's...

It's quite profitable, first off. And secondly, it comes from both sides, Lance. Like where we're selling our FWA, 5G FWA, right? Today, we've got a great pipeline. We are starting to now convert bunch of those large enterprise customers, right? From a connectivity perspective, right, like all of those are great target customers to sell more software, right? We're already selling some software to them, but now we are bringing new software capabilities to them. The other way around is true as well, right? Customers who are buying a certain application from us like Ctrack, for example, right, they are a great customer base to now go sell 5G into that customer base. So it works both ways for us.

So when I think about -- and maybe this is too narrow, but when I think about the software, I think of it as device management, security, analytics and so forth, really giving the enterprise control over large deployed networks of their devices for their employees. Is that sort of...

It's one. I mean that -- and you think about how the enterprises handle that today, right? How they handle it today is they build these very sophisticated secure networks, right, with lot of secure networking capabilities on their campuses. And past the pandemic, there is no single campus anymore, right? Like the campuses where your employees are, where their homes are -- homes or locations and all that, right? That has increased the complexity of the IT managers now, their ability to now fully manage their corporate networks, right, because they have to give all of these remote employees, customers, partners access to their network. And how do you do that? That's where the 5G brings a single network, right, through which like -- through a single pane of glass and a single cloud attached to the 5G network, you could now go after a very distributed workforce and give them great security and networking capabilities, right?

So what are the attach rates like with the software that you're seeing right now?

Pretty high. I mean just the first layer of software, we're seeing great attach rates. I think most customers will take it. Most enterprise customers will take it. And then now with the new solutions we are coming out where we are in trials with at least this new networking solution. I mean, we think that the enterprise IT managers will love it because they just -- it makes their jobs so much more easier to secure all the remote workforces from a single pane of glass.

Sure. So before we get into the cost side, I do want to just ask you about your exposure to sort of the 4 horsemen as I've been calling them. We've got COVID, which is maybe arguably in the rearview mirror now, but possibly not, we're seeing some lingering effects here today. We've got the war in Eastern Europe. We've got inflation and we've got potentially weakening consumer environment. So could you talk about the impact or the potential risk from each of those on your business?

Yes. I would say the biggest risk from all of them was the risk of the shutdowns in Asia.

Right.

The shutdowns...

Which we saw recently.

Which we saw recently, and we've been managing it really, really tightly. So I'm not seeing a huge impact on us as yet. But I can't predict what happens there in the future, right, if supply chain gets impacted or something like that happens. I think it's behind us, but we're still very closely monitoring it. I'm not seeing the impact of the other factors on us yet.

Okay. And then I know, at least not too long ago, the fact that you were -- well, I might be getting this wrong. But I recall, Inseego as sort of the non-China alternative for much of the Western European telecom suppliers and enterprise customers. Is that still -- are you still getting doors opened in interest from that sort of shift away from the Huaweis and the ZTEs of the world?

Very much so. Very much so. In multiple geographies.

Okay. All right. So in terms of the supply side, you mentioned -- just mentioned the potential delays associated with the supply chain challenges last quarter. Could you remind us a little bit what exactly -- how does that work? So there are lockdowns in China, how does that impact the business?

We'll so -- I mean, look, we do our manufacturing and production in Taiwan, right? But they're very tightly knit, right? A lot of the component suppliers, logistics, transportation, all of that got affected with Shanghai. So although we managed to do well with the products that are in production. We were seeing some delays working out the bills and all that for our new products that we're going to launch this summer. We've still managed it very carefully and I feel super confident that we'll get through this without any major impacts. But that's where we kind of sounded a little bit of a warning because the whole world around us was crumbling. Every company was going out there and saying they have a huge impact. So we thought it's prudent to make sure that we properly message it that, look, this could impact us as well. So far, it hasn't and we're keeping a very close eye on it.

Okay. Well, that's actually -- so what I thought I heard from the last earnings call was more of a, this has sort of caused a 1 month -- 1 quarter delay in the revenue ramp that we had previously expected. Is that -- was that a little bit not -- is that too conservative of a take?

Well, look, what we can forecast, we can forecast. What we said that, look, given -- there were 2 factors we described. One was these COVID related shutdowns in China. And second was the service plans from -- the 5G service plans from the leading carriers across the globe for FWA, right? Those are the 2 factors. And so that's what we messaged. We said, look, because of those, we're suspending trying to give any outlooks in the future, we're just trying to say, look, let's just get through this global phenomena and then we'll come back and we'll provide guidance on the long-term basis when we are able to.

Okay. So I want to go back to Foxconn. So certainly, that has been a big asset of the company, your relationship there, the decision to sort of consolidate all of your supply to Foxconn, notwithstanding what's happened recently, has been a huge advantage relative to every other company that I cover in terms of your ability to navigate the tightness in the supply market. At the same point, it seems to have come at the cost of you've given up a lot of operating leverage that you otherwise would have had. And I might get the numbers wrong, but I recall if we go back to 2020 when you were reporting 50%, 60%, 70% year-on-year revenue growth, your incremental gross margins were, I want to say, like in the 25% to 30% range. Which is not terrible, but at the same point, if your incremental gross margin is not above 50%, it's hard to move the needle in a meaningful way. And I'm wondering, number one, do you, feel free to dispute the premise, but if you -- do you have any ability, are there price point benefits that will kick in at some point that will give you some of those savings, so you'll be able to get the upside on the volumes going forward?

Yes. I mean, look, you look at our business, right? There are multiple factors in play, right? One, just some of the carrier FWA is just kicking in right now, like T-Mobile just announced a few weeks ago new service plans, right? So that's a big positive for us, right? I we've been one of their key partner of FWA choices since like last fall, we announced with them, right? We've got a [ stock ] product with them. That -- as that takes off, that should be very margin accretive to our business because it's set as the way we can sell software there, right? We've got also a great pipeline going through distribution with our FWA solutions, right? Again, very high software attach rate, right? That's happening as we speak right now. A lot of those customers in the pipeline have been trialing and some of them have started to make buying decisions, right? That's number two. Number third is we've had a subscription software business that's been growing like crazy over the last couple of years. That still continues to grow. That's number third. Number fourth is the Ctrack business makeover we are giving, right? So at some point this year, we will come back out with a much different solution set on that business, that would then sometime next year, it starts to go on a growth trajectory, right? Number fifth or sixth is this new networking software stack on 5G that we are coming out with soon, right? So you look at all of those, it's not one, but we have multiple levers happening on software and higher-margin businesses that should start to -- that have started to kick in. And that quarter-over-quarter over the next multiple quarters should give us a nice bump in our margins.

And as you think about long term, I mean, I'm not going to ask for a specific time frame, whether it's 3 to 5 years or what have you. Do you see -- is there an opportunity to get material improvement in your gross margin? I mean like 5 to 10 percentage points someday? Or...

Absolutely. Absolutely. And not -- it's not 5 to 10 years from now. It should be in next -- look, we haven't given that guidance, I want to stay away from that, but it's not many years from now, let me put it that way.

Okay. On the other hand, inflation. I do want to ask you about this from the standpoint of your cost structure, I assume that all of the parts are going up in price, and you're paying more for labor and overhead, et cetera. Could you -- I mean, rough ballpark, how big of an issue is this in terms of percent of revenues? Is your SG&A line going up 100 basis points, 200 basis points, less, more?

So to be honest, Lance, other than what happened last year with the long lead times on the supply chain. We have not experienced the effects of inflation on our supply chain. I think we've had great partners, and they're working with us. I mean, it's stabilized like late last year, and it's been stable. And at some point this year, we start to see improvements in that supply chain. So no, we're not seeing that.

And what about just your sales and marketing and so forth and just overhead in general?

No, it's very stable for us.

Okay. Great. I guess just to double back on the 5G. We're hearing a lot of fanfare, and I know you've been very active in selling 5G products. But as I think about -- how would you describe in terms of where we are versus when the rollout is? And I remember in 4G, we had this period of time when the carriers were advertising 4G, but it wasn't really a very different product set. And when I look around, I'm not seeing the sort of revolutionary new 5G applications the way that, at some point, I expect that we will see them. Am I just not looking in the right spots or do you think there is still much more to come from that perspective?

No, a lot of it is happening, Lance, but it's a matter of priorities, right, for us and for the ecosystem. I think the first couple of years the smartphone transition from 4G to 5G, hotspot transition from 4G to 5G, that was a low-hanging fruit and the industry did that very quickly, right? A lot of products got in the market. Now the next evolution is FWA, right? That's where you're now seeing major push by global carriers, right, and major push by the vendor community like ourselves, like we got a great 5G FWA portfolio which is second to nobody in the industry in terms of performance and capability and extensibility, right? We are seeing, I mean, just crazy use cases. People are trying to deploy 5G for just -- I mean, a bunch of those things that you've heard, like factory automation to pop up clinics, COVID clinics to connecting stores to health care applications. There's all kinds of stuff happening. You hear about lot of those things as pilots because that's how new technology begins. FWA is essential to bring all of those use cases onto one combined network, right? So that's why FWA is happening in a big way now. And then look, it's not just 5G. It's this mix of, it's 5G, it's cloud, it's edge cloud, it's AI, it's video. So it's a mix of many of those technologies for some of those far-reaching 5G use cases. They have to work together, right? And that's where the industry is making a major push. And we're seeing like real tangible progress in many of those verticals.

So we've got a very constructive revenue outlook. The margin outlook is flat to improving in the short term and then very bullish in the medium to longer term. Costs are under control. In the U.S., you've -- obviously, you've made a big push with T-Mobile. Has that come at the expense of your relationship with Verizon? And are you continuing to see volume and revenue growth at your longest-standing U.S. customer as well?

Yes. I mean we've got great products with Verizon. In fact, very soon here in the near future, we've got this full FWA portfolio that's all approved by Verizon. It was approved last year sometime, I think in Q3 or so. Now we are turning on the C-band capabilities on that portfolio very soon. So we've got great relationship with Verizon and no conflict with standing of T-Mobile as a key customer.

Okay. Great. So maybe just to turn to finish up. We've got a few minutes left. I do want to ask you about the balance sheet and liquidity. You exited the quarter with, I believe it was slightly over $40 million in cash. You have $150 million of convertible notes outstanding. When do you expect to go free cash flow positive? And how comfortable are you with your current liquidity?

First off, let me answer the latter one, right? So first off, we are very comfortable with our liquidity. And the reason is because we kind of model the company that way, and I described those different layers of businesses that we are bringing online right now over the next 6 months or so. All of those are going to be very accretive to the cash that it generates for us, right? I mean they are all good margin businesses and mostly software packages on the top of the hardware we build, right? So feel super confident that, that's a great journey we are on, and that should start to significantly improve the profitability and reduce the burn -- cash burn, right, later this year, right? So that's the latter question. The first part of the question was, sorry, can you remind me? I lost the track.

Well, no, I mean, really just how comfortable -- I think you just answered the question, really. It was how comfortable are you with the liquidity position. I guess a related question though is how do you intend to address the convertible notes maturity? Or what are your thoughts there?

They don't mature until 2025. So really not an issue for us right now. But as we start to turn cash flow positive, hopefully, like here by early to mid-next year, we would then start to pay that off.

Okay. What about M&A? Are there opportunities for Inseego? And I guess to the extent that you believe that there could be, maybe are they bolt-on opportunities? I know you actually sold an asset not too long ago. I assume that there aren't any more opportunities to monetize other assets in the portfolio, but maybe I'm wrong on that. Could you talk a little bit about that?

No, that's correct. I think all the current assets are all core to the company. And the reason we had sold off the South Africa piece of Ctrack was just it was a different market, very different market, right? And I think it's better off to be with a local company than trying to be a U.S. company trying to do business there. But yes, look, M&A, we're not out looking for big acquisitions, but small technology companies that can add to the 5G fabric that we are bringing to the enterprise customers would be attractive.

Okay. And do you feel like you have the balance sheet to do that? Or would you be using stock? Or would there be incremental debt facilities that you might put in place? Or would this just be financed off on your existing balance sheet?

All of the above. We don't want to -- obviously, we're not looking to go and sell more equity, that's not in the cards right now, but all the other options we'll evaluate if we find something attractive.

Okay. We are just about out of time. But before I lose you, I'll just see if there's any questions from the audience. No? Okay. Any closing statements from you that you'd like to say in the waning second year?

First off, thanks for having us here, Lance. And again, just to the investors like, look, 5G in the enterprise is still a very early market opportunity and a huge, huge TAM and SAM building for us over the next several years. And we're very, very fortunate to be playing in this market where we bet back in 2017, and we're really well positioned to win in this market and create a long-term sustainable business here. Thank you.

Ashish, thank you very much, and we look forward to hearing more as the year progresses.

Thank you, Lance.