Q3 2022 Inseego Corp Earnings Call
Hello, and welcome to <unk> Corp, 's third quarter 2022 financial results Conference call. Please note that today's event is being recorded all participants will be in a listen only mode.
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On the call today is Mr. Ashish Sharma P O and Mr Ball Barbieri, Chief Financial Officer, and other members of the management team. During this call non-GAAP 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.
[noise] section of the company's website, an audio replay of this call will also be archived there.
Please also be advised that todays 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 those 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 Ashish Sharma Chief Executive Officer. Please go ahead.
Thank you operator, and welcome to the Siegel as third quarter fiscal 2022 earnings call.
As mentioned in previous calls and CECO is currently in a transitional phase we shifted from being a company solely focused on designing and manufacturing hotspots.
One that Leverages, our core technologies to provide a full suite of connectivity and mobility solutions to enterprises, where our fixed wireless and SDN products. Our results. This quarter reflect this transition and we believe you're on the right path. We delivered a strong top line 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, the Mifi X pro to Verizon in the U S and Telstra in Australia.
This is an important validation of our products as you may have heard us say that the stock business carries lower gross margins, which is a contributor to why we saw a gross margin ticked down this quarter.
Adjusted EBITDA was a loss of $2 5 million.
EBITDA was lower than we anticipated due to the ongoing impact of high supply chain cost and a noncash 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 I will report.
R&D expenses to decline in short order.
In Q3, our five G 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 you transition the company and move towards our financial targets and.
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 initial ramp of our enterprise <unk> business.
That business now accounts for over 13% of our revenue and importantly boasts a much stronger margin profile than our traditional hotspot business.
We've now sold five G products to our 600 enterprises this year with our enterprise base exceeding 1000 customers all in various stages of deploying five G. Many of these enterprises followed the same path budget and test 22, 15, CECO devices to test and evaluate with the goal of.
Deploying devices, along with our software across their entire footprint. These deployments are mission critical with full deployment occurring over multiple quarters and it is also important to note that the vast majority of these wins are coming at the expense of competitors such as Cisco and kill point, you've also added a lot of new end.
<unk> customers to the list of ongoing pilots thanks to the breadth of our five G portfolio, we're seeing a trend of more and more customers choosing and seagull or the competition.
Before I provide additional Q3 highlights I want to share three reasons why we are confident even approach cash flow breakeven by the end of this year.
As many of you know we've made substantial investments in product development and go to market initiatives over the past few years.
Dispositions in Seattle, as the leading provider of best in class five G fixed wireless access or after many solutions to enterprises.
Second we continue to tightly manage all of our costs, we've already taken out close to $20 million cost out of the business annual run rate year to date, and we will continue to remain dedicated to our free cash flow goes no matter, what 'twenty 'twenty three will look like.
On the R&D side, we have completed several key mid band certifications over the past two quarters that will enable us to lower expenses going forward.
Third the dramatic increases in the available spectrum and network performance made possible by five G will give rise to a host of new enterprise service offerings and we're hearing this in all of our dialogues with our tier one carrier partners.
And lastly, our carrier partners are only now beginning to rollout meaningful enterprise focused after the way services and your plans to support them those are becoming more commonplace and we expect to see real expansion of this in 2023.
So let's get into some examples of the customer momentum we saw in the quarter.
The new customer and new commercial real estate sector.
They cut the cord with a local cable ISP once they tested our outdoor five G of timely solutions and experience upload speeds of 151 M. B P. S. That's correct I said upload.
Another example of a new customer we recently secured is a well known car wash gene based in the Midwest.
As with all retailers consistent uptime for video surveillance and payment transactions is paramount the customer was facing challenges with the satellite communications they were using as it cannot deliver reliable performance and inclement weather, which compromises their uptime.
After successful testing in a number of locations or five G of tubular solution was selected for primary connectivity, replacing their existing satellite ISP services.
On the carrier side in addition to lower Telstra launch in Australia, we expanded our relationship with Gray, Austria part of the three group companies. The last hour Ved maker S. G 2000, and indoor solution for their business customers during the quarter.
I also want to address our investments in inventory.
This had been a headwind to cash flow generation and are now beginning to moderate as you can see in our inventory position exiting Q3.
Given the challenging supply chain with long lead times of many constrained components or the last couple of years, we increased our inventory position significantly over the past few quarters. This was done to ensure we have adequate supply to meet our customers' needs in this newly developing five gfwl market. We believe that bill has plateaued.
And we will be able to sustain a downward trend and manage do demand without major cash needs.
Considering the progress we've made on all fronts, we remain on track to approach cash flow breakeven by year end and most importantly, we are poised to generate positive free cash flow in the first quarter of 2023 and expect to remain positive thereafter.
I want to thank our employees and customers for their continued support and I would now like to turn the call over to Bob who will provide more details on our Q3 results.
Thank you Ashish, let me now review the results of our third quarter fiscal 2022 please.
Please note that all metrics and comparisons made or non-GAAP on a pro forma basis adjusting for the divestiture of <unk>, 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 prior year and up 12% on a sequential basis, our growth reflects higher than anticipated sales of our new Mifi X pro products, partially offset by anticipated declines in <unk> products sold to carriers.
Next generation solutions, which are comprised of five G devices in 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.
Frequently higher mix of hot spot revenue, which had lower contribution margin than we've seen of late due to a higher component and distribution costs associated with the initial launch of our Mifi X pro product.
The majority of these costs are not expected to recur in Q4 and beyond meaning margins on our carrier product should rebuild in the coming quarters.
Also worth noting gross margin on our enterprise SWA sales remains robust and few three exceeding 40% and leaving us confident that our gross margin has ample room for expansion as we continue to scale our enterprise business.
Gross margin for the enterprise SAS segment was 54.1% relatively consistent with the past two quarters.
Q3, non-GAAP net loss was $12.4 million or 11 per share compared with a loss of nine per share in the prior quarter at a loss of eight cents per share in the year ago quarter.
We reported and adjusted EBITDA loss of a negative $2.5 million, which was up from a loss of $1 million in Q2, and a loss of 800000 in the year ago period.
The change was largely due to the supply chain costs alluded to earlier and higher than anticipated levels of R&D. This quarter, which included the one time non-cash adjustment of 700000 related the capitalized software expenses.
Incurred in prior periods and also higher certification cost that will abate as we now have completed a major product launch at a teen key certifications from our carrier partners for.
For additional details on our non-GAAP and adjusted EBITDA results. Please refer to the reconciliation tables in our press release.
Cash cash equivalents in restricted cash at the end of Q3 was $18.1 million or cash usage approved from the prior quarter are working capital consumed additional cash due to the timing the borders.
For the remainder of the year, we expect our quarterly cash usage to trend lower and approached cash flow breakeven. We believe this will leave us well positioned to generate positive cash flow on a sustained basis during 2023.
We note that our expectation for generating positive cash flow next year is predicated upon a steady ramp in our enterprise fixed wireless revenue and growth on our five G carrier hot spot sales offset by the anticipated decline in our four G product sales.
As mentioned previously we continue to be focused on cost and ensuring we are cash flow positive next year.
We continued to prioritise growth in our higher margin enterprise sales, which we believe will have a transformative impact on our business by increasing our mix of recurring revenue expanding our margins and ultimately sustaining strong free cash flow over the long term.
With that let me turn it back to Ashish for his closing comments.
Hey stop so the key take away from a Q T. F that is that is a steady progress against her key initiatives.
And we continue to approach an infection point in our business.
The availability of five G enterprises definitely offense become more prevalent [noise], we have their position to benefit from the growing demand for our products and talent.
Now based software solutions have a high attach right [noise], providing us with a high margin and they're cutting <unk>.
This enterprise growth layered on top of our existing cost structure [noise] mallette intimately transforming siegel into the high growth company, but 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.
Let me ask a question you May Press Star then one on your telephone keypad and if you're using a speaker phone. Please pick up your handset before pressing the keys.
With your all your question. Please first star then too and at the time will pause momentarily to assemble our roster.
Again, if you have a question. Please first star one.
Our first question will come from land to Vitanza Cowen and company. Please go ahead.
Hi, guys. Thanks for taking the questions I have kind of three areas that I was hoping that we can explore.
The first on the revenue side and that is in.
IOP services revenue was up about five 6 million Bucks a year on year, it's about a 10% increase and just wondering if you could.
Help us break that down between.
Increased hot spots versus software five G versus four K price versus volume any of those any any additional color on those categories would be helpful.
L as Skype talking to you.
Sheesh.
So let me take that so first good question I would say that too.
Two components.
Craze.
And that <unk> Avenue, one is the new hot spot largely hakluyt, new customer and Tasha in Australia I would say, that's that's Netgear Avenue and then number two I would say the continued growth in our enterprise <unk> Avenue. That's that's all located in that I O T at both of them.
So I would say that to make appointments.
Are you seeing I guess a question are you are you seeing any change with respect to the unit pricing on either side is this I mean shall we just think of it as being pure increase in units that you're selling or is there a pricing component as well.
Well, let let me, let me step back a little bit right <unk> you know since I took over the seal earlier in the year right. We did a comprehensive review of all the businesses.
And we started to change your focus from <unk>.
Changing every type of revenue 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 close the enterprise after glare business like.
It was a component of this this crazy you're talking about and yes. The margins. They are significantly higher I mean out the gate were seen 40 plus percent margins. There. That's that's embedded in that revenue number two I would say on the hotspot side, we're still focused on taking that revenue.
Key selected carrier partners may not changing a bit <unk>.
But low margin business, because the hot spot tends to be quite a lower margin business compared to enterprise into their business.
And we did see an impact on a hot spot margins quite evident increase the score, but he continued to see higher elevated supply chain costs.
Particularly care that it was a brand new product and a quarter.
From approval launching it we had to put everything on air and so there are higher higher cost of shipping container.
Continue to be hired complainant cause I would say that's the mixture dealing with as the agenda more and more enterprise have to upgrade Avenue you start to see that margin really you know shift towards towards much more than what we see today.
Okay, great and so that actually answered most of my gross margin question, but just to sort of follow up on the gross margin. You know you did call out the elevated supply chain crossing the quarter and I'm. Just wondering you know do you have any ability I would think that you would be able to like a lot of companies that we cover to go back in and <unk>.
Some of those increased costs to your customers and I'm wondering if if that is that is the market just too competitive for you to do that or is it simply a need the nature of the the one time nature of the cost increase that really didn't give you. The the time that you needed to go out and get these costs back or.
How should we think about that going forward.
Yeah. Good question. So on the enterprise solid side, we have done all of that right. We have increased the pricing, but it is still a.
A smaller piece of our revenue, even though it grew to 13% quarterly revenue. This time, but I would say on the hotspot side. It is a very competitive market even for our carrier customers.
Certain slots out there.
There's pricing and elasticity of volume with pricing on the slot. 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.
The customers 10 cent increase the pricing.
But still like like I said like it was just too much hotspot revenue this quarter that shift at the margins downwards given in general the module and hot spots are quiet lower compared to the <unk> enterprise bodkins.
Okay understood and then lastly on the margin I mean, it looks like so that 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 you know with where we are as it relates to the fourth quarter and sort of the turnaround in in margin or should you know or do we have to worry that well Gee there could be some other one time items that come up that crop up you know over the <unk>.
X 60 days yourself.
The landscape given that the the launches the new product you know at least two big ones.
<unk> the score.
We're fairly confident that we gotta see improved module step score or I don't see those type of pet vet's heading this again.
Okay, and then just shifting if I could relax and then I'll wrap up I promise, but on the balance sheet.
I did.
Could you know I I would imagine that given your relationship with Fox caught that your minimum cash balance is quite low but could you talk about that I mean, how much can I know you have the revolver, which is great. But you know is there sort of a minimum cash balance that we should 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 company 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.
Yeah. So let me give high level overview, there and then I'll ask Bob to chime in here, so three things having to highlight one.
We took out $20 million in and cost this year as it run right already so that's one number two is is the the end mentally 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 the you know supply.
Cause you know, but you know by putting stuff on the boat and bye bye bye trying to pre by with long lead <unk>. So that's moderating now and that's gonna trying to you know get in a trend downward. So it it really special on spending more cash there. So that's number two and number three in the most important one.
It is we are seeing you know a lot of traction in our enterprise after Blair business with you know already this year, we have signed up hundreds of new customers with higher margin revenue. So combination of those three.
Bob's team has done a very very detailed modeling we're fairly confident with the cash in and I've already got you don't plan to use that or or or a cash needs. It's mostly for some working capital changes in the quarter. We go through here and there, but but we'll be able to manage the business.
<unk> cable and forward with those three three different text I talked about so Bob if you have any <unk> yeah.
Hello lamps.
The only thing I would add you know you've been with us so you'll notice.
Heavy investment.
Two transformations translations of such wireless of having the credit portfolio physician and then the second transition from <unk> earlier or previous generation four G. They've been previous generation five G. Two new generation five G Hot spots, we've already made those with us.
So first from the investment need we feel really good.
Of course, we're going to spend some money, but the heavy lift is behind US second we wanted to avoid what some other companies failed.
We're stockout limited to what they could supply so if anything we intentionally inventoried up so to speak Tibet. We mail have very very good optics body skew or as to what the demand cycle should be so we'll moderate those down and then.
<unk> the cost and it wasn't you know when we talk about cause it was really we don't need the same investment.
I 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 and what they saw as a grade five G opportunity and as such we mail hooked up behind us. So we can reduce costs and I'll, probably colleague bone and muscle, but by just correctly sizing since we do have all of those with vegetables already.
<unk>, hopefully that helps lamps, but feel free to physical follow up.
Thanks I appreciate it.
Thank goodness.
Again, if you have a question. Please press Star then one.
The next question will come from Mike Lattimore with North one capital and please go ahead.
Hi, this is <unk>.
Could you tell me what was international as opposed to the date of revenue.
And until.
Alright.
So one thing I would say that have traditionally we've not broken out our international Avenue is a percentage.
This quarter I would say given that <unk> that that was significant part of the revenue.
Yeah. So that's.
So it so I would say it's Ah you know, we don't give out that specific granular, but it was it was over 10%. So we took advantage of a.
Good opportunity with Telstra every satisfied that.
Alright.
And could you give some color on if you're seeing any <unk> among the enterprise by us given the macroeconomic concerns.
And it is a good question so from our perspective.
Five G is quite a bit of momentum in the enterprise N S. M B market because if you if you look back to when the pandemic began.
The you know the broadband access to broadband Internet became the lifeline for a lot of those businesses and customers and and so from our perspective, we see this as I mentioned in a previous call me see it says in essential services that every enterprise every employee of.
The enterprise needs to have and five G actually gives them a totally onto the capability you know based on location. It has affected the location of where the employee surveys. So we're not seen any slow down from the enterprises on evaluating and then continuing to deploy a five G.
Alright, that's helpful. Thank you.
They get a test.
Again, if you have a question. Please press Star then one.
This concludes our question and answer session.
To turn the conference back over to Mister a C Sharma for any closing remarks.
It seems that we actually have another question that just came through and that will come from Mr. Scott thorough with Roth capital. Please go ahead.
Hey, good afternoon, thanks for taking the questions Uhm Ashish I apologize you probably covered this earlier in the call.
But I just hopped on could could you take us through the gross margin impact.
You know.
Headwinds on that front I'm sure from a component availability as well as some logistics issues can you take us through kind of where where we are today and how you should 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, It's Scott nice talking to you. Thanks for the question. So so on the gross margin fun you know we had a couple of things happening this quarter.
And Ah one <unk> that are enterprise, except the way our business you know grew quite a bit. This this quarter and it's 13% of revenue and that's all a higher margin W 40, plus percent margins on that.
Also you know had had significant stocking orders for a couple of big hotspot launches. We did this you know this quarter and that Kinda you know took the margin down because because because the hot spot, but facing higher supply chain costs given it was new launch in the court.
We had to put everything on the care and and and then lead time. So it's still a little bit long. So we had to you know or a bunch of that material let in advance.
So those are a couple of things happening in the corner I would say I'm going forward Scott.
Irrespective of what you saw in the gross margin. One you know one we will definitely improve the gross margin next quarter. They don't see all of those things repeating again and number two they're quite a bit focused on free cash flow generation Ah into Q1, and I'm getting very close to cash flow break even at this quarter.
And that's really driven by three things I mentioned earlier you know one is is the girls in our enterprise after Glared Avenue, which is which is a great highlight number two is we we did take over $20 billion in costs from the business given our change in focus changing more quantitate Avenue versus the quad.
D of revenue and and and and that focus is all about <unk> and third is that you know this new hot spot got lost this quarter and so you know so now we don't quite you're not quite facing the same supply chain pressured that'd be dead and last.
And so in queue for that should come up so that's kind of quick summary of how we were thinking about but you know the margin in the Castro.
Perfect and and she she if I could just follow up on on fixed wireless access comment 13% is a is a big number.
In the the September quarter could you caliber.
Calibrated 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 for that product line.
Yeah, Scott whatever it says is that geography is print thing a predominantly North America right now because.
Because the you know the couple of carriers here are the most aggressive one on enterprise after the way voice.
It says you know the carriers internationally. So some most of it was coming from North America, and I would say just a ballpark you know that number is you know tough you know, 50% lumpy selling the previous call.
Great. Okay. Thanks, so much guys.
Thank you Scott.
So I'm gonna just summarized now thank you operator, and thank you everyone for.
Joining us on the call today.
Look forward to updating you all next quarter on a continued progress. Thank you again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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